AAR Corp (AIR) 2014 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to AAR's fiscal 2014 earnings conference call. Before we begin, I'd like to remind you that comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as noted in our news release and the risk factors section of the Company's Form 10-K for the fiscal year ended May 31, 2013. In providing forward-looking statements, the Company assumes no obligation to provide updates to reflect future circumstances, or anticipated or unanticipated events. At this time, I would like to turn the call over to AAR's Chairman and Chief Executive Officer, David Storch.

Thank you sir, and good afternoon. Thank you for joining us today as we discuss our first quarter fiscal 2014 performance. I'm joined at our corporate headquarters with our Tim Romenesko, our Chief Operating Officer; and John Fortson, our Chief Financial Officer; Mike Sharp our Chief Accounting Officer and Controller.

So here are some of the highlights from the quarter. Sales were $515 million, down 7% from $551 million the first quarter of 2013. As expected, sales in our Technology Products Segment were down, mostly due to lower levels of activity in our mobility systems business. This was partially offset by good performance at the commercial cargo business. In Aviation Services Segment, sales were down slightly from the prior year, as we had lower sales in our supply chain business, which we expect to recover during our second and subsequent quarters. We continue to see good results in our airframe maintenance operations, where we're ramping up our Duluth facility and added a third line to meet demand. Further, we had a strong quarter at our airlift business, where we continue to maintain high readiness levels.

We are pleased to report that despite lower sales, our operating margin in the quarter was 7.4%, an improvement over the 7% operating margin reported in the first quarter last year. This improvement was a result of our continued focus on cost management and higher operational efficiency across several of our businesses.

Net earnings for the quarter were $0.45, equal to last year's diluted earnings per share. In this quarter, it is also important to point out that we continue to focus on cash generation, generating $27.5 million cash from operations and $20.3 million in free cash flow, which is in excess of our net income. We reduced our net debt by $22 million from May 31, which brings us down $109 million from August 31 last year. We paid dividends of $0.075 per share during the quarter.

In the Aviation Services Segment, sales were down slightly from last year. Our MRO business continued to perform at high levels of capacity utilization, demand for maintenance services from our customers remain strong, and as previously mentioned, in late August we added a third line in Duluth. In addition, late in the first quarter we announced the opening of our sixth North American aircraft MRO facility in Lake Charles, Louisiana. We received limited authorization from the FAA on August 30 to begin operations at this site, and we are in the FAA's queue to received authorization as soon as possible. The facility significantly expands our capacity, as it will enable us to handle up to 7 wide- or 10 narrow-body aircraft at a time. And as we sit here today, we have four wide-body aircraft in the facility receiving maintenance. During Q1 our commercial supply chain management business experienced seasonal softness, which we expect to recover throughout the balance of the year, mostly on deferrals and to satisfy supply demands that are sold there, but basically will occur in Q2 and beyond. Also subsequent to quarter-end, we delivered the first of two customized 737 aircraft to the US Marshall Service, and we expect to deliver the second aircraft in a few weeks.

Our airlift business produced strong results in the quarter and continues to maintain high operational readiness levels. In early September, we received preliminary notice of intent from our customer to exercise the option on approximately $100 million of rotary wing contract revenue. As previously discussed, our airlift business also has $110 million contract covering 12 rotary wing aircraft expiring on November 30. We believe there are a number of different outcomes for these aircraft, including extensions on the expiring contract, as well as fulfilling customer requirements on other contracts.

I'd like now to turn to our Technology Products Segment. As anticipated, sales were down in the segment due to year-over-year decline in mobility business. We expect sales of our mobility products business to remain steady going forward, and to be neutral to prior year's results for the balance of the fiscal year. Despite the sales decline, the business continues to be a market leader and a profitable contributor to the Company's results. In addition, our commercial cargo business continues to perform well year-over-year.

In closing, we are encouraged with our earnings and operating margin performance in the quarter, as the Company continues to generate strong cash flow. Sitting here today, we see many high potential opportunities to grow the core business, both internally and externally. Thank you for your attention and support. And I will now turn the call over to John Fortson.

Thanks, David. I will provide a bit more color around the financial performance of the Company during the first quarter, including comments around interest, cash flow, capital expenditures, and capital structure. Mark Sharp and I both will be available after the call to answer any questions that you may have.

Revenues in the first quarter were $515 million versus the prior-year level of $551 million. Aviation Services revenue at $394 million was essentially flat to prior year. As David mentioned, our airframe maintenance facilities and airlift operations continued to perform well, and were offset by lower revenues in our supply chain business. Technology Products revenue declined 21% quarter-over-quarter to $121 million, driven by the expected decline in demand for mobility products, which saw a $35 million sales decline from last year first quarter. Again, we expect sales of our mobility products business to remain steady going forward, and to be neutral to prior-year results for the balance of this fiscal year. Our commercial cargo systems performed well in the quarter.

Consolidated gross profit margin in the first quarter was 16.5% compared to 16.4% margin in the prior year first quarter. As mentioned in our release, margins in Aviation Services Segments improved to 16.6%, primarily driven by efficiency improvements in our MRO operations. On the Technology Products side, the decline in margin to 15.9% in this quarter from 19% in the first quarter of last year was primarily driven by the volume decline in mobility products. Moving on, we did a really good job with cost management this quarter, bringing SG&A as a percentage of sales to 9.3% from 9.7% in the prior-year quarter. We are attacking cost across the Company, and are pleased with the progress that we have made. Operating profit at 7.4% for the quarter was 40 basis points better than prior-year quarter. As we have said before, improving our operating profitability is a focus across the Company, and we're pleased to see this margin improvement, particularly with the revenue decline versus the prior year.

We remain very focused on cash generation. During the first quarter we generated $27.5 million of cash from operations. We had $7.2 million in capital expenditures, and $20.3 million in free cash flow. Net interest expense for the first quarter was $10.7 million, an increase over $10.2 million from the prior year, primarily due to our upsized senior notes offering. As mentioned by David, in this quarter we reduced our net debt by $22 million sequentially, and $109 million over the 12-month period. Depreciation and amortization, including amortization of stock-based compensation, was $21 million during the first quarter. Our first quarter diluted earnings per share is based on 39 million shares in our diluted share count. which is down 2.7 million shares from last year's level. Thank you for your attention. And operator, we're now ready to take questions.

Thank you.

(Operator Instructions)

Larry Solow, CJS Securities.

Just on the aviation supply, I realize first of all you had a pretty tough comp last year. I think growth was 13% organic, and I know quarters, there's a seasonally slower quarter and you don't guide to the quarter, but did a little bit of the flatness catch you a little bit on surprise? [There's only, I guess] in the supply chain, and is that all basically just time, really just a timing issue? And --

Yes. Our view is, first of all yes, to some degree we were expecting a stronger quarter. We had a few customers who deferred heavy engine business, for instance, and therefore pushed off some of the activity into Q2. But we are expecting to recover the shortfall from Q1 into Q's 2, 3, and 4. We also mentioned in our press release, we didn't mention in the conference call script, and that just something we missed, but we are reaffirming full-year guidance on sales and earnings.

Right. So, I mean, you really haven't even -- the mix that's in two segments hasn't really changed much? You still see basic -- sounds like it's all timing-related?

I think it's timing. I think, Larry, if you look back two years ago, this quarter we had sales of about $490 million.

Right.

So I think last year we did have a strong quarter. We had a couple of individual situations that caused that to be. So we did expect higher sales this summer from our supply chain. But it's not -- we do expect that we did -- what did get pushed off, based on what our customers are telling us, we do expect to recover that business in the out quarters.

Okay. And I realize it's there's some slowness in this time anyhow. Have you seen -- are you seeing orders or activities starting to pick up as you get, it's a little bit seasonally stronger time in the fall?

Yes. I think that we feel pretty good about how the quarter's starting. And as we've mentioned also, we will be delivering two aircraft this quarter. So we are expecting a fairly solid quarter.

And could you talk a little bit about Louisiana in terms of scope? It sounds like it's similar in size to Indy, I guess you have more wide-body capabilities, but that. And then the second part of the question is sort of how you expect the ramp over the next couple of years?

It's very different than any other facility that we have. So you're dealing with each hanger is capable of handling wide-body aircraft. And we view the capacity increase as approximately 7 wide-body and 10 narrow-body aircraft. We have received provisional authorization from the FAA to do work on aircraft that are currently in the hanger, and we're in queue to get the full FAA license. So we're very early in our involvement, and it's a little bit hard to predict precisely what the ramp might be, but I would imagine that by a year from now, we'll have a much steadier, first of all have much more visibility. I think we'll have a steady contributing business to our profitability. So we only received the provisional certification on August 30. So we're not even a month into the having the operation. We have over 100 mechanics and we are doing work on four customer aircraft. And we are today looking to hire more mechanics, and hopefully we have a fully operational business by the end of the calendar year.

Okay. And just last question on the SG&A, You did a great job at bringing out costs, actually especially considering you're in a down sales environment, you're seeing improved leverage. Is some of that somewhat discretionary and timing-related as well? Or is that --

Some of it is structural in nature. And some of -- keep in mind, last year we're offering more facilities. We closed a couple of facilities last year. So some is structural in nature and -- but the preponderance of savings is around a sharp focus around spend. So we're watching travel, we're watching freight, we're watching office supplies, shop supplies. And we're looking at critical materials that go into some of our manufacturing businesses. So I think it's pretty much across-the-board. And I believe the effort is gaining momentum.

Great, okay. Great, thanks, David.

Yes.

Julie Yates, Credit Suisse.

David, it looks like if you maintain this level of profitability, you'd be well ahead of the guidance that you're reaffirming today. So can you help us understand, is this conservatism? Or are there other puts and takes later on in the year that I'm not factoring in?

I think we always -- we prefer to be under-committed and over-delivered. And I think it's our preferred approach. So yes. I mean, I think we feel that we're giving the appropriate guidance based on what we know. And we hope that we perform well against that guidance, and exceed it where we can.

Okay. And then was the Technology Products business, was it a little bit weaker than you had anticipated? Because I think last quarter you said that you had expected that it had leveled out.

No, no, no, no. We had indicated that we had at least one or two more quarters, and we anticipate that we pretty well level out at the end of the period we just ended. So we don't anticipate much more in the way of decline, very minor decline in Q2, which would be better than what we have previously communicated.

Okay. And then just with all the news out of the Air Force on KC-10 and the risk around that fleet being scrapped in sequestration, can you help us think about, I know that flight-hour contract is a 0% margin, but can you help us think about the risk for you guys there?

I think if the Air Force goes the route of taking the KC-10 fleet down, they will do that as they take on new KC-46s, I believe the number is. And at least that's the way it's been explained to us by Northrop Grumman. Of course those delivers don't start out, I think to, what, '015 or ' 016, and there's a few a year. And by the time these aircraft are out of service, our contract will have expired.

Okay. Understood. All right. Great. Thank you very much.

Tyler Hojo, Sidoti & Company.

Just firstly, I was just wondering perhaps if you could quantify what the impact was in the quarter just from some of the deferred heavy engine visits that you were referring to? Would commercial sales volumes perhaps have been flat year-on-year if not for that? Just trying to put some context around that. Hello?

Yes, we're just trying to answer your question.

We'll have to do the math to figure it out, but I'd say that if we would have had the sales that we were expecting, we would have at least had flat commercial sales. I think maybe

it would have been actually --

No, actually commercial sales, we just checked. Commercial sales would have been stronger, had what you mentioned happened.

Really? Okay. So talking about a pretty significant amount of work.

Keep in mind, the decline was relatively modest. The decline is right around 1%, a little bit over 1%. So the sales that got deferred, had those sales happened, had we hit those targets, then we would have exceeded -- we would have had commercial sales growth, yes.

Okay. Understood. Thanks for the clarification. And then just in regards to the guidance range. I'm just curious, what you all are anticipating in terms of future contribution from joint venture income? I think it was about $1 million in the quarter.

Tyler, this is Mike. That amount going forward is going to be reasonably modest. It's not going to be any more -- we don't expect it to be any more than that amount in Q2, 3, and 4. So relatively modest number.

Okay. And then just in context with that, maybe you could provide us an update with where we stand with the owned and co-owned aircraft portfolio?

There's no difference in our aircraft portfolio from year-end. We have, I think, four aircraft owned in joint venture and then two aircraft in our wholly-owned portfolio.

Okay. Great. Just a couple of other ones here. You mentioned in regards to the airlift contract that is still outstanding, I think it's $110 million, that that's coming up, I think in November. When would you expect to come to an agreement with your customer? Would it be sometime soon, or would it perhaps stretch all the way to the expiration of the contract that you currently have?

I think we'll have some knowledge next week. We're expecting some knowledge next week, but there's a lot of shuffling, if you will, in terms of different possibilities and outcomes. So we're in touch with the four-star levels. And I think there's a little bit of -- I think they're trying to move things around and aren't really ready right at this moment to commit. But we anticipate some commitments as early as next week.

Okay. That's great. And David, in the past you've discussed the desire, I guess, to ultimately move some of your airlift assets outside of Afghanistan. Could you maybe talk about the pipeline there? Or are things kind of robust enough where you don't really need to worry about that anymore?

I think we'd still like to have a better balance to our fleet. So we still do worry about it and think about it. And we are offering assets into other markets. So yes, we continue to work that pretty actively. And I would say that the deal pipeline in both regards, in the currency theater as well as some other markets is fairly brisk this moment.

Okay.

But there is a fair amount of uncertainty coming from the customer in terms of what their actual requirements might be.

Okay. So how would it work for you guys? Would you wait until you hear what the requirement is before you look to place additional aircraft outside of Afghanistan? Or would you be willing to essentially buy additional airlift capability to fulfill additional --

We may not buy. We may lease, or we may figure out another way to get -- to use assets, customer equipment, et cetera. So we're looking at a few different possibilities.

Okay. Great. And lastly from me, was wondering if you could provide us some guidance just in regards to CapEx and free cash flow for the year?

Tyler, I you should think about our CapEx, we had a little over $7 million this quarter. Sort of in that $30 million to $40 million range for the year, notwithstanding anything unusual. I'm sorry, what was the second part of the question?

Just free cash flow.

On the free cash flow front, what we've talked about fairly consistently over the last 12 months is identifying as our target, free cash flow equal to our net income. And we've delivered on that. We've exceeded that the last several quarters. So I think the way to think about that is equal to our net income.

Fantastic. All right, great. Thanks a lot, guys.

(Operator Instructions)

Jon Braatz, Kansas City Capital.

Going back to Louisiana, given the lease payments and so on and the amount of volume you're running through that facility, is that a little bit of a drain on your profitability early on here?

Very minor, but yes. I mean, it's more of a drain at this moment than contributor.

Okay. But not really significant?

No, not really significant.

Okay. And then secondly, let's move forward let's say nine months, and you've done a good job of generating free cash and paying down debt. And let's say you get to a point where you've paid off another $75 million, or something like that. Would your focus return continue to be on free cash and debt repayment, or would you be more inclined to shift a little bit and think about acquisitions and purchases? Or would you continue to focus on debt repayment?

John, I think that there's kind of -- part of our thinking today is looking a little bit more externally towards investments and deals. We're also looking at investing in program activity to support some of our supply chain initiatives. So I think the free cash flow picture could change as a result of one or two of these events occurring. But in the meantime, we continue to drive the existing businesses to generate as much cash flow from operations as they can, and that energy will continue. And hopefully we'll be able to find good places to invest some of this capital we've been generating.

Do you think that could be more of --

We're focused on EBITDA as a total to net debt. And I think we're making a nice dent in that. And get that ratio right, and then we'll be more apt to get more aggressive externally.

Do you think that could be -- would that be more of a fiscal '15 possibility, or still something happening this fiscal year?

I think you might -- it's possible you'll see some stuff happening in '14.

Okay. All right. Thank you, Dave.

J.B. Groh, D.A. Davidson.

I apologize if you've covered this, but could give us the utilization rate in MRO in the quarter?

In terms of hangar capacity?

Yes, how many slots are full, that kind of thing.

Just kind of in general, it was a reasonably strong quarter for the MROs. During the summer, the inputs are always a little bit lighter, but they performed very well. As we go into the balance of the fiscal year, the story gets a little bit tighter. But I'd say the first quarter was normal. We had some capacity, but we're able to flex the workforce and things like that to adjust for it.

Right. So there's the normal seasonality, but if you're not willing to put a number on it I understand, but could you maybe talk about how it trended versus last quarter, I mean last year, rather?

It was positive in terms of the number of hours produced across the facilities.

And then when you look into say, Q2 where on a seasonal basis you'd be busier, how did do the advanced bookings look relative to what you did last year?

They look strong.

So up?

Yes.

Okay. Thank you very much.

Stan [Mann], Manning Family Investments.

They heard me.

Pardon me. Your line's open if you have your phone's on mute. Could you unmute your phone, please? All right. We do have a follow-up question from Julie Yates, Credit Suisse. Ms. Yates, your line's open.

Can you guys disclose what the growth was in commercial and defense? The organic growth by end market?

Julie, there was a sales decline in defense right around 7%, and the sales decline in commercial was right around 6%.

Okay. Do you have those figures for the full year '13 as well?

Not at my fingertips.

Okay. I'll follow-up.

Yes.

Commercial I believe was up 16% --14%, commercial was up 14% and defense was down 10%.

Okay. Thank you.

Larry Solow, CJS Securities.

Could you update us on the precision manufacturing business? I know it has a couple hiccups over the last few quarters. I think one last quarter. Any update on that?

We continue to work through and address our issues there. And we feel like going into the second quarter, our performance will be significantly better than the first quarter, and actually the last few quarters. So I think we're making progress on it, Larry. And I think this quarter, we should start to see some meaningful results from our efforts.

Okay. Just on Louisiana, I don't know how you can answer this, but it seems like it will be pretty modest negative impact early on. And maybe for the full year not a huge impact positively, so is it fair to say sort of a pre-breakeven, maybe slight positive for the year?

I'd be disappointed if it's not positive.

Okay. Good. Okay, great. Thanks.

(Operator Instructions)

And I'm showing no one in the queue at this time. I'd like to hand the conference back over for any closing remarks.

Thank you for your participation. And I look forward to our next call in 90 days. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.