AAR Corp (AIR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the AAR Corp fourth-quarter and fiscal-year 2012 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.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Greg Dellinger, with AAR Corp. You may begin, sir.

Thank you, Kevin. Good morning, ladies and gentlemen, and thank you for joining our fourth-quarter fiscal-year 2012 earnings conference call. Before we begin, I would like to remind you that comments made this morning may include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. We ask that you refer to the disclaimer contained in our news release, as well as the Risk Factor section of the Company's Form 10-K for the fiscal year ended May 31, 2011. In providing forward-looking statements, the Company assumes no obligation to provide updates to reflect future circumstances, or the occurrence of anticipated or unanticipated events.

And now, at this time, I would like to turn the call over to our Chairman and Chief Executive Officer, David Storch.

Thank you, Greg, for your cheerful introduction, and good morning, everyone in attendance today. I am sitting here in our Wood Dale headquarters with Tim Romenesko and Rick Poulton. And we will go ahead and provide a little color, and answer any questions you may have to the results we published yesterday. And as you saw yesterday, we reported our fourth-quarter fiscal-year 2012 results.

Some of the highlights -- sales were a record $563.3 million, which represented a 16% increase over the prior year. Diluted earnings per share before the impact of special items was $0.45. And after the effect of special items that we have identified in the fourth quarter, our diluted earnings per share was $0.32. For the full fiscal year, sales surpassed $2 billion for the first time in the Company's history, and diluted earnings per share was $1.65. We reported16.5% organic sales growth to commercial customers for the fourth quarter, and 15.4% organic sales growth for the full fiscal year. Sales to commercial customers now represent 60% of total sales, as reported in the fourth quarter.

Our commercial parts businesses experienced double-digit sales growth for both the fourth quarter and full fiscal year, driven by our industry-leading position. Recently, you may note that we were named Parts Supplier of the Year by Airline Economics magazine, which recognized our overall performance, strength and diversity, as a supplier to the airline industry.

In the Maintenance Repair and Overhaul segment, we reported double-digit sales growth in the fourth quarter, as we brought on new customers and expanded relationships with existing customers. During fiscal-year 2012, we sold over 4 million man-hours in our Maintenance hangars, which is up from just around 3 million man-hours a couple years back, and we experienced over 1,000 Maintenance visits by 33 different customers. We captured new programs, and increased the number of customers using multiple AAR facilities through our One-MRO concept. We were also named best airframe MRO provider in the Americas by Aircraft Engineering, Technology and Maintenance magazine.

On our March call, we discussed challenges at our Airlift operation, around the aircraft availability. We implemented a number of initiatives at Airlift to address this issue, and we have seen meaningful improvement since the start of our new fiscal year. In the March to July time frame, we have seen a 50% improvement in our non-mission-capable aircraft rate. And as a result, our operational readiness statistics have significantly improved, and we are meeting our customer commitments. We expect this improvement to continue the balance of the fiscal year, and it will have a positive, meaningful impact on our results. Sales to government and defense customers declined in the fourth quarter, primarily due to reduced program activity in our defense logistics business, and the previously discussed KC-10 contract adjustment.

Subsequent to May 31, our Board of Directors authorized us to repurchase up to $50 million of our outstanding shares of common stock, $50 million worth, I should say. Today we have purchased 335,000 shares under the new authorization, at an average acquisition price of $12.39 per share. We have not been in the market the past week or so, leading up to our earnings announcement, but we will continue and resume purchases shortly after the investment community has a chance to absorb our latest earnings release that we put out yesterday.

I will now hand the call over to Rick, who will provide further details on the financial performance during the quarter. After Rick's comments, I will provide some closing remarks.

Okay, thanks, David, and good morning, everyone. As is customary, I would like to provide a little more detail on the performance in each of our operating segments. And then I will conclude with some comments around interest, depreciation and CapEx. So, let's start with our Supply Chain segment. In our Supply Chain segment, sales increased 21% compared to the year-ago period. We saw a real increase in demand from our airline customers, mainly due to our improved product availability. And sales were also higher, as a result of our growing distribution business.

You should note that the year-over-year growth in this segment equaled or exceeded the year-over-year growth in any other quarter in fiscal '12, after excluding the effects of aircraft transactions earlier in the year. So, there is good momentum in this business segment. Our gross profit margin in the Supply Chain segment was 18.2%, which, while down slightly from Q3, compares very favorably to the year-ago period, as well as Q1 and Q2 of fiscal '12. As we look ahead, we feel good about the investments we have made in our Supply Chain business and our position in the market.

In our government and defense services segment, sales declined 21%, primarily due to lower program activity in our defense systems and logistics business, including the KC-10 contract charge that we talked about in our release. During the fourth quarter, we recorded that $9.5 million charge as a result of lowering our profit expectation on a portion of the KC-10 support contract. Once again, the adjustment represents the difference between the new profit margin expectation, and the previous profit margin expectation for the period of performance that dates back to the inception of the contract, which goes all the way back to February of 2010. So, the charge represents a cumulative catch-up adjustment.

It is important to emphasize though, that the KC-10 contract is still a profitable piece of business for the Company. In addition, the improvements that David noted earlier that we are beginning to experience in our Airlift business are expected to deliver improvements to our financial results in this segment, significantly bigger than the impact of the lower margin we will continue to record on the KC-10 contract going forward.

Moving to our MRO segment, sales increased 14% compared to the prior year, and our gross profit margin was essentially flat at 14.8% from the prior-year period, but it was up 300 basis points from Q3. Each of our airframe MRO centers reported higher sales in the period, and remain encouraged by the demand environment. I would like to remind everyone that, as is typical at this time of the year due to the summer flying season, we would expect first-quarter sales will be down in our MRO segment compared to the fourth quarter, but they should compare favorably on a year-over-year basis.

In our Structures and Systems segment, sales increased 70% year-over-year mainly due to the impact of the acquisition of Telair and Nordisk. Our mobility products unit also had a very solid quarter. But during the period, we recorded a $3.7 million restructuring charge related to the three facilities we are closing, and this impacted our margins during the period. Our gross profit margin in the structure and systems segment, excluding these restructuring charges, was 16.8%.

Moving down below the operating profit line, our net interest expense for the quarter was $11.5 million, up from $8 million last year, and reflects the increased outstanding borrowings related to our acquisition. The cash portion of the interest expense was $8.2 million, and our non-cash portion of interest expense was $3.3 million. During our fourth quarter, we generated a strong $76 million in cash flow from operations, and our CapEx was $28 million, and our depreciation and amortization for the quarter was $23.8 million. Looking ahead, our CapEx plan for fiscal '13 is $55 million, which is significantly down from both fiscal '12 and fiscal '11.

During our fourth quarter, we recorded a $3.3 million income tax benefit, which related to changes in book to tax return differences. Going forward, we would expect a normal effective tax rate of approximately 35%.

So, with that, I want to turn the call back over to David, who will provide some closing comments.

Thanks, Rick. We enter 2013 with solid momentum in most of our businesses supporting airline customers. We also have the full-year -- the benefit of the full-year operations from Telair and Nordisk, which are performing well, and in excess of our acquisition expectations. We expect significant operating improvement at Airlift, and stabilization in our precision machining businesses as the year progresses. Results in our defense logistics and mobility products businesses are expected to be down for the fiscal year.

As I put a wrap on this, I would say that we recognize that we have some execution challenges in fiscal-year '12. But I want to let you know that we are all over this. And as a result of the experience that we have gone through, we are staying relatively conservative in our fiscal-year '13 outlook. And putting out -- we put out a range in our pre-release of $1.55 to $1.65. And we are going to go ahead and perform against that target.

So, with that, what I would like to do is open this call up to any questions that you might have.

(Operator Instructions).

Our first question comes from Lawrence Solow with CJS Securities.

Good morning.

Hi, Larry.

I was wondering if you could just help me, just parcel out sort of the defense business which is $900 million or so, just based on the 60/40 split under your guidance? In terms of the, the pieces that are declining, is it fair to say that it is three pieces in your business, and give or take plus or minus there about evenly, between mobility, logistics and defense? Is that fair to say? And is it really the mobility piece and part of logistics that is declining? And the second question would be, I guess, the worry is, the declining, is it a multi-year thing? Do you have any sort of grasp on that? Is it just guesses at this point, I mean how low could it go?

Yes, Larry, I think the best way to think about the -- our government defense stool, if you will, is three separate legs.

Yes.

One, being Airlift, two, being our defense logistics businesses, and three, being our mobility products and other manufacturing businesses. Our Airlift business, I think we have talked about quite a bit. We expect to have solid demand in that business for the foreseeable future. And, we expect increased and improved financial results from the business as a result of a lot of the operating improvements, that we have talked about both in this call and previous calls. Our defense logistics business is the business where KC10, among other programs is, and that program as you note, we obviously lowered our margin expectations. That margin expectation goes forward with us, going forward. But I think with that adjustment, demand remains pretty good for that business, as we look ahead. So, as we think about Q4 as a baseline for that business, we will obviously be impacted by operating tempo of business. But otherwise, we think these assets that we support are very important assets for our customer, and should continue to operate, notwithstanding what is happening with defense spending right now. And, in the third leg of the stool, our mobility products and other manufacturing, I think that is the business that has performed well for fiscal '12. But we do see some lower backlog --

Right.

And we expect that to be down, as we look ahead.

Right.

And so that total perspective I just shared, is embedded in the guidance that we have given so far.

And, I guess the mobility business would probably concern, at least some in terms of -- is that declining because of cuts in defense spending? Is also a demand issue, as we sort of pull out of certain areas? I mean, I know there's always other theatres, that we will be in, but it does look like there is certainly a little less activity? So, is that more, what was it, over built supply, so they don't -- it's not necessary -- is it sort of just a pause in this type of stuff, or is there no real way to define that?

Well, our mobility products, and specifically we think are still strategically critical to our customer. So it is not a question, that they become obsolete or anything like that.

Right. Not obsolete, but do they become --?

There have always been some ebbs and flows in demand --

Right.

For the products, and certainly, the amount of spending and funding available will help -- will drive some of those ebbs and flows.

Yes.

But we, again we feel good fundamentally about that business for the long-term, but we do expect a little slowing of demand in the near-term.

Okay. And just switching gears real quick, and I will move on, just could you just give a quick update? You mentioned your distribution sales are doing well as well in the Aviation supply. Is that -- obviously Unison, how is that contract performing?

Larry, Unison is a part of it. But I would say, on balance we are seeing new programs coming on board. We see a lot of interest in AAR as a distributor, both on commercial and military product lines. So we are encouraged by our overall performance there, with Unison being a part of it.

Great. Excellent. Thanks.

Our next question comes from Tyler Hojo with Sidoti & Company.

Hi, good morning. Just wanted to follow-up with the last question on Airlift specifically. How much backlog visibility do you have into kind of a stable business through fiscal '13? And, if there are some kind of major additional contract updates, you need to get to perhaps get to flat this year? This fiscal year?

Our backlog, our contracts are good through fiscal '13 actually, through part of fiscal '14. So we feel good about the visibility there. The -- we are encouraged by the improvements in performance that we've seen over the last several months. As David said in his comments, we expect this performance to continue. In terms of new opportunities that are out there, we see a variety of different avenues that we are pursuing. Much of our attention of late, has been on improving and execution. But at the same time, we are now out there in the market, in the markets, looking for ways to diversify our offerings, and get into markets that we see providing us opportunity, out into the next several years.

Tim, how would you characterize those opportunities? I mean, is it pretty significant in terms of what's out there? Or is it pretty well tapped?

Well, there's a lot of money being spent in the areas that we are talking about. In some cases, the money is going to operators that are non-US-based. We think that those are, are ripe opportunities for us to go after and capture. So, I would say that the opportunity pool, or at least the opportunity pool, we would say, is extensive.

Okay, great. And just to clarify some of David's comments on, in the prepared remarks, the 50% improvement in -- I guess it was aircraft readiness, does that bring you back to kind of where you need to be? Or is there still additional improvement that needs to take place from there?

It - there is still opportunity for better operational performance, which translates to better financial performance. So we see additional upside, as the year progresses. In terms of meeting customer expectations, we are significantly improved. So now, it's about operational improvements, managing our planning and our costs, our inventory levels. And then, translating that into improved financial performance.

Okay. But would be fair to say that the heavy lifting has pretty much been done at this point?

I would say that we have experienced a significant improvement, but we are not giving up, and we see additional opportunities for improvement.

Okay, great. And just lastly for me. If you wouldn't mind, kind of updating us on the aircraft portfolio? It looks like some JVs sold this quarter, and any expectations for additional sales in fiscal '13?

Yes, Tyler. We're -- we continue to prune the portfolio. As you know, we have been working on for quite a while now. And, we would expect to have further JV items that get cleared up this year. Having said that, I think the emphasis will be on generating cash, I would not expect a big P&L impact from those transactions. But you should expect to hear, see more of the portfolio being addressed throughout fiscal '13.

Okay. You mentioned cash, Rick, but what are your free cash flow expectations for fiscal '13?

Well, you will note from my cap CapEx comment, Tyler, that capital spending will be down significantly.

Yes.

And I would just tell you, so the free cash should mirror that. And I would rather not go out with a range right now. But you can do your own math, and I think we had the opportunity to have a pretty significant free cash flow this year.

Okay, great. Thanks a lot.

Our next question comes from J. B. Groh with D.A. Davidson.

Actually, my question has been asked and answered. But thanks for your time.

Thanks, J. B.

Our next question comes from Stan Manning with Manning Family Investment.

Hi. I have some questions. A simple one on buybacks. You've got over 3 million shares left on your buyback. Do you expect to implement that over the next fiscal, is that your expectation?

Stan, based on the cash that we generate from the businesses, we expect that over the balance of the fiscal year, that the repurchase would be spread out over the balance of the fiscal year. Yes, that's correct.

Okay. Is that included in your projection on your 2013 fiscal? The share buyback, the reduction in shares and EPS?

Yes and no. I mean, I think there's a little bit yes, and a little bit no. I can't say that it is fully reflected in the numbers.

Okay, because that is a substantial buyback. The total is in the area of 10%.

Right.

Okay. So, it may not all be in there?

That's correct.

So, the $50 questions is as follows. What do you see possible, an upside, possible upside, that has not been put into your 2013 projection or EPS?

I would prefer not to go there. I prefer to go ahead, and see our -- watch our performance. Maybe we can do more visibility to that, as we put Q1 to bed in September, and go from there, Stan.

Okay. In looking, you have always had operating goals that were significant, that were kind of hurt this last part of the year. Are you still on your vision, looking at the operating margin moving up to 10%, 12%, do you see that the possibility of this business at this point in the future?

Well, do I see it in possibly the future, does absolutely. I believe at this point in time, we have execution issues, we have addressed. We have been all over these execution issues. As we nail these, margins will improve. I prefer at this stage at least -- we do have internal goals. But I prefer at this stage, to go ahead and as I have indicated, Stan, go ahead and put Q1 on the books, and go from there.

Okay. Last question, D&A. Is it approximately going to be nearly $100 million in the 2013 fiscal?

Yes, yes, Stan it will be.

Okay. That's --

Maybe it will be a little higher.

Wow. That's pretty -- so that gives us of potential cash flow.

Yes.

Thank you, gentleman.

Thank you.

(Operator Instructions).

Our next question comes from Doug Carlson with Bank of America.

Yes. Thank you. Just a quick question on the logistics business. I know that's been a little bit of drag. I think you kind of touched on some of that on the call. If you could just narrow down, exactly what's the problem of logistics business, and how do you plan to bring that business up a bit in 2013?

All right. Just so we are clear, when you think of our logistics business, you have to think of two businesses, our commercial logistics business and our defense logistic business.

Right.

Our commercial logistics business has been very strong. And you see growth rates far in excess of the industry or any other measurement. So, let's make sure we are clear in that regard. As it relates to her defense logistics business, we had less utilization by the customer. We've had a couple of programs go away, one program in particular. And we had a charge-off, in terms of our expectations around KC10 profitability, on the flight hour agreement aspect of that program. We do believe that the defense market is ripe with opportunities. Our organization is all over those opportunities. And we would anticipate over time that, that business will be performing very well as well. So when you think of AAR's logistic businesses, I would say on balance, they are very strong.

Okay. All right, so defense. Okay, great. That was it for me.

Yes.

Thank you.

Our next question comes from Jim Altschul with Aviation Advisory.

Good morning, gentlemen. Just something I wanted to throw out, in light of what you're talking about, in terms of a share buyback. Since the Company has significantly increased it's debt, do you think it might be prudent, instead of buying back 3 million shares, to use some of that cash to pay down some debt?

Absolutely. And we will continue to do that as well. So, we're hoping to generate enough cash to do both. So if you look at the prior periods, we've taken our excess cash, and we have bought down our convertible debt, and we have done that successfully, discounts, et cetera. So, yes, as the opportunities presents themselves, to buy in debt, we will do that, yes.

Thank you very much.

And I am not showing any further questions. I would like to turn the call back over to our host for closing comments.

With that, I think, I appreciate your attention and participation today, and look forward to our next conference call in September. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.