AAR Corp (AIR) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to AAR's FY14 fourth quarter and year-end earnings call. Before we begin, I would like to remind you that comments made during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as noted in our news release and our 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.

Hi. Thank you very much, and good morning, ladies and gentlemen. Thank you for joining us today to discuss our fourth-quarter and FY14 year-end results. We will also provide some guidance on expectations for our FY15 with a little color, and I am here in the suburbs of Chicago, joined by Tim Romenesko, our Chief Operating Officer; John Fortson, our Chief Financial Officer; and Mike Sharp, our Chief Accounting Officer and Controller.

Just to reiterate some of the highlights from the quarter, sales were $505 million, although down from prior year, up from prior quarter. Sales in the aviation service segment were lower, primarily due to softness in MRO and Airlift, so we had fewer positions in the Airlift operation. And MRO just went through some seasonality issues with certain customers. We haven't lost any business. Just less demand during the period.

Our supply chain business had a lot of momentum. Had a good quarter. And goes into the new year with a strong backlog and a lot of exciting things going on. Technology products we had softer commercial sales, largely due to fewer 747-8 systems but we did experience commercial -- I'm sorry -- defense growth with A400M system sales.

Operating income in the quarter was $33 million. Net earnings for the quarter were $0.43, which was higher than the latest consensus and higher than what we reported for FY13 or the prior year's quarter. For the full year, sales were $2.04 billion, which would be a decrease of just under 5% for the year. Operating income was $146 million with slightly better margins, 7.2%, than prior year performance. We reported diluted earnings per share of $1.83, ahead of the $1.81 consensus expectation, and this compared to $1.38 reported for FY13.

As we look back at the year, it's important to point out that we also generated significant cash flows. So we had cash flow from operations of $140 million and free cash flow of $113 million which equates to $2.90 per share. With that cash, we paid some dividends, and we further reduced our net debt position. I should add that we made significant investments -- net of that we have made significant investments supporting the growth in our supply chain businesses.

As I move over to aviation services, in our fourth quarter, sales were down 10% versus prior year. Supply chain had a strong performance, starting to see the benefits of investments we made throughout the year and the positive impact on new programs. Today we are fully operational in our supply-chain hub in Brussels, and we continue to expand our reach across a series of new clients. We expect meaningful growth from these programs with supply chain having won an aggregate value of $1.9 billion of new contracts during the fiscal year that will be realized over the life of the program.

Some of the programs are five years in duration, some are 10, some are 12, but clearly this is a newer trend for the Company. Historically our supply chain businesses had a shorter window. Today we're spending not just shorter deals, but also more longer deals in our effort to become more integral to our customers' operations.

In MRO, sales for the quarter were down, driven primarily by cyclical downturn in our landing gear business and the wind down of meaningful engineering service contracts. You might recall that engineering service business where we have a crackerjack team and capability in place, is very deal sensitive, so if you get a deal, it's great business. When you don't get a deal, it's not as good. But when we do comparatives, on a year over year basis, last year we had a very appealing deal with North American carrier, and this year we didn't have that business. But those guys are knocking on doors, and I'm sure they will have successes to report during this current fiscal year.

To counter some of the headwinds that we have experienced, we've refocused our MRO leadership to exploit the advantages of our one MRO strategy and to aggressively pursue business opportunities with new customers and for wide-body airframes. We're proud to complete our first 777 work which we performed on behalf of AeroMexico, who we also did 767 work for as well. So although sales were down in the period, we have taken steps to improve that performance. I think you can -- as this year unfolds, when you look at the back half of the year, we are fully sold-out in our MRO shop. And we do expect turnarounds in our landing gear operations as the gear repair cycle kicks in.

Airlift continues to transition new opportunities as we discussed at the beginning of FY14, with 40 flying aircraft positions. We ended the year with 20, which was three lower than we guided last quarter. Airlift did a good job reducing costs and finding efficiencies throughout the year to reflect this new environment and came in with excellent operating margins. For FY15, we anticipate the positions will trough in Q1, and we got down to 17 in June but will increase as previously awarded positions come online. We expect to finish the year with 28 positions operating.

Let me now turn to Technology Products. Sales in this segment were down 4% driven primarily by softer demand for the commercial cargo products. Mobility products actually had a strong quarter and performed better than last year with higher sales for the quarter than prior year period. However, commercial cargo had lower sales than expected due to reduced 747-8 cargo systems demand from Boeing and lower spare sales.

Going into FY15, we expect commercial cargo to transition to increase production as the A320 and the A350 ramp. So we are exclusive on both of those models. We will also be a beneficiary of the A330 where we sell systems between 350,000 and 450,000 per chip set, and as many of you saw on Monday, Airbus announced their intentions to create a 737 -- I'm sorry -- and A330 Neo which will keep that aircraft operating or on the production line for at least another 10 years.

In closing, as we move into our new fiscal year, we will continue to focus on execution, finding growth opportunities and improving our performance in margins while delivering high levels of cash generation.

So let me do this at this moment, let me turn the call over to John who will fill you in on some of the financials, and then we will circle back to me for closing comments.

Thanks, David. I trust that each of you had a chance to read our earnings release which was posted yesterday afternoon. On this call, I'd like to review a few key points with regards to our performance.

We improved our consolidated gross profit margin in the fourth quarter to 17% from the adjusted 16.3% in the prior year period. This performance translated into a 16.8% margin for aviation services and a 17.6% margin for technology products.

SG&A as a percentage of sales in the fourth quarter was 10.5%. This is higher than last few quarters due to higher compensation expenses this quarter. I would like to note that we expect in FY15 for these margins to improve on a year on year basis going forward as our cost control initiatives continue.

Our operating margin for the year was 7.2%. During the fourth quarter, we generated $63.1 million of cash from operations, and our capital expenditures were $5.3 million. We are very focused on receivables management and cash collection.

We continue to delever and reduced our net indebtedness by further $89 million from the prior year, ending the year with total debt of $634 million and net debt of $545 million. Our net debt to EBITDA is currently at 2.3 times, down from 2.6 times a year ago and 3.2 times at the end of FY12. This is within the range we have set ourselves as a target of 2 to 2.5 times.

Net interest expense for the fourth quarter declined to $9.1 million. Our net interest expense numbers continue to decline as we focus on paying down debt.

Depreciation and amortization including amortization of stock-based compensation was $23.6 million during the fourth quarter.

For FY14, our effective tax rate was 30.5%. For FY15, we are anticipating this rate to be 32.7%. This is a change from the 34.5% we've historically guided people to for planning purposes and reflects increased utilization of tax credits. We are analyzing our tax position carefully, and after reviewing our tax obligations over the last five years, we feel comfortable in guiding to this rate of 32.7%.

We enter FY15 with 39.1 million shares in the diluted share count.

David discussed our anticipated schedule of aircraft positions over the next year at Airlift, but I would also note that we now have 12 aircraft available for sale which is up from 9 at the end of last quarter with a combined book value of over $33 million. We continue to analyze the portfolio and may consider adding more aircraft to this list if the situation warrants.

Our after-tax ROIC for the year was 6.1%. In FY15, we are adjusting management's compensation plan to include ROIC as a performance metric in the Company's long-term incentive plan. ROIC has been used by our business units to manage their businesses for a long time. We believe it is an important return metric that we can use at corporate to drive performance and will be monitoring it closely going forward and seeking improvement.

There are a few businesses that have been a drag on this corporate rate, and we are now dedicating effort to improve these as we have finished our deleveraging. Thank you for your attention, and I will now turn the call back over to David for some closing comments.

Let me just add a little bit to that. As John has alluded, our net debt to EBITDA ratio has come down from a peak of 3.2 down to 2.3. Another way of looking at it is we had actually peaked at net debt at about $805 million after we closed on the Telair and Nordisk acquisitions, and today we are at net debt of $545 million. So we've had meaningful reduction -- in the two fiscal years, we've gone from $750 million-ish to $545 million. So we've taken a couple hundred million dollars of debt or capital off of the business.

So we're very pleased with that and we think we've put ourselves into an appealing leverage ratio which now causes us to look at things and focus on those businesses that are performing and those business that are underperforming. We've had a couple of underperforming businesses which have been a drag on our return calculations, and I just want to state that before this year is out, we will take actions with these businesses that will lead to a positive impact on how we give returns on the capital that you've entrusted us with to manage on your behalf.

So let me move on and conclude with our guidance for FY15. As stated in our press release, we currently expect sales in the range of $2.1 billion to $2.15 billion. Aviation services we expect to see strong growth in our supply-chain business and improved opportunities in MRO.

We also expect the Airlift to have some puts and takes as it evolves both losing some existing position but gaining others. Please have comfort in knowing that we've had very appealing -- very attractive returns from this business and this business has been a very positive cash generator for the Company.

In our Technology Products business, we do expect a ramp of shipments on the A400 M cargo loading system and improvements in commercial cargo as a result of A320 and A350 deliveries. And our mobility business will continue to experience some softness as military budgets remain under pressure. But in taking a look around the world and looking at so many unsettling situations, we wouldn't be surprised if at some point the mobility business gets a call to action and sees an uptick in effectivity.

I should also just comment on the fact that this business is still a leader -- has a leadership position in its market niche, and we've seen operating income in that business that has been in the $75 million range. Today we are operating in the $20 million range. So you can see we've had a significant falloff in demand, but we still maintain a leadership position in that market and exclusive on many of the products that we do deliver for the DoD.

We anticipate full-year diluted earnings per share in the $1.80 to $1.90 range, and our customer schedule for heavy maintenance business is light during the first quarter but increases significantly in the second half of the fiscal year to the point where most of our facilities are sold out for the second half of the year. Because of this and the positioning schedule of our aircraft portfolio, we do anticipate the first quarter will be a little softer than other quarters this year. And we always like to stay away from hockey stick approaches, but the reality is we do have some seasonality to our businesses and this is how we look at the businesses unfolding for the year.

In closing, I would want to reiterate the strength in the performance of the Company during the year in terms of its cash flow generation, and I would encourage investors to look at this indicator as a sign of strength coming from the Company. So with that, I will close my comments and open up the phones for any questions you might have.

(Operator Instructions)

Larry Solow, CJS Securities.

Hi. Good morning. Thanks for the comprehensive update. Just a few questions. We've spoken about the ramping of several contracts in the supply chain.

Perhaps you could just review where we stand on some of the major ones. Unison, is that fully ramped, and how is the Eaton deal going? Then just the new consumable parts contract that you announced last quarter?

Hey Larry. The consumable program is still ramping. We're working aggressively to set up a new distribution center in Indianapolis to support that program. It will probably take us a few more months I would say to get to full ramp.

The Unison transaction is going as we had anticipated, in accordance with our schedule. And on Eaton, we're continuing to ramp that program and we see additional opportunities to grow that product line.

It's been -- we've had a tremendous amount of success in this piece of our business. We're digesting the volumes, but we see significant new opportunities here.

Okay.

Larry, let me add also that the investment that we've made in the Brussels operation is leading to deals flow coming out of European customers and Middle East customers that we have not seen before. So the team is aggressively pursuing that market in a way that we didn't really have the capability or visibility in the past.

Great. And then on the Airlift business, the projection for 28 aircraft being utilized at year end, does that assume most are out of Afghanistan, beside -- I guess there are some from this new contract you announced last year. And I realize there is some uncertainties, but are you assuming -- or is this 28 based on ongoing discussions of what you have -- believe to be in hand today? Or do you assume that you will get new contracts?

Go ahead.

No. So these assumptions are based on our contract positions in Afghanistan as well as previously announced contract positions both in Afghanistan for NATO, but also incremental positions in Africa that we've already been awarded, Larry. Of the 28, four are what I would call new business. The rest are already awarded positions that we're expecting the contracts to get turn on.

Got you. And then just commenting on David's comment about some of the underperforming businesses. Can we expect a potential sale of some of these things don't improve, or are there initiatives out there that you expect to improve operations which will help returns?

Larry, let me just say that by the end of the year that we will have these -- our intention is to have these problems solved.

On cash flow, another fabulous year in terms of cash flow, is that a sustainable number? How do you -- what's the outlook for that in 2015?

So we are looking at directionally in a similar way as we experienced the last couple of years, but we do anticipate some investments in the supply-chain business which might not allow us to hit quite the same level as we had this year.

Okay. Got you. Great. Thank you.

But it's -- we expect it to be strong.

Great. Thanks.

Julie Yates, Credit Suisse.

Hello guys. This is actually [Krishna], her associate. Julie is on a flight right now.

But just wanted to ask if you could give a bit more color on your 2015 guidance? I was just wondering where do you guys see some potential for upside to that and potentially even where do you guys see some risks? Thank you.

Yes. I think we see potential for upside in the supply chain. We've been putting pressure on the supply chain group to grow its earnings at a faster clip than they've submitted, let's say, and the deal flow seems to be pretty robust.

We are not calculating in any significant deals in that number. So if we do have a deal or two which -- and they are out there -- that would have a positive impact on our results.

Okay. Great. Thank you.

Kevin Ciabattoni, KeyBanc Capital Markets.

Good morning guys. Thanks for taking my questions here.

Sure.

Looking at the guidance for 2015, just wondering if you could give us some color on maybe some of the margin headwind versus 2014. Is that just a matter of mix with Airlift positions coming out? Any color you could give there would help.

Yes. Kevin, that's an accurate read. I think really you got -- we have a both a sales and a margin mix shift going on a little bit.

And so as Airlift comes down, obviously that puts some downward pressure, and as the supply-chain businesses kick in, they have to continue to produce volume to get the margins back up. So that's what's happening there.

Okay. Perfect. And then just one up on Larry's Airlift question. Can you tell us how many positions you have baked for that NATO 18 contract? Then also what you guys have baked in in terms of the asset sales for next year?

Yes. So we have four NATO positions that we have -- that we've been awarded. We're just waiting for the go-ahead, and I think part of that is waiting on the services agreement to be signed between the countries. In terms of baked into the plans for sales, I think we have a few but not the full complement of aircrafts that are for sale.

Okay. Thanks. Last one for me. Last couple of quarters you guys have given the billable hours in the quarter, and I was just wondering if you could give us that for 4Q and maybe the comp for last year.

Yes. Just hang on a second here.

Thanks.

I have got to get it out of my stuff.

Do you want to get back to him?

Yes. That's fine. That's all I have.

I've got so many pages in front of me. So our billable hours over the last 12 months, we sold over 5 million -- 5.035 million hours of work sold. That's a production efficiency of 107%. We worked on 1082 aircraft.

Do have the fourth quarter number with you, John?

Fourth quarter. We sold 1.218 million.

Okay. Perfect.

Production efficiency, just so you know, is 111%, so it was good.

Okay. Thanks guys.

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

Hi guys, it's Alex Heinen on for J.B. today.

Hello.

Just a quick follow-up question on the MRO business here. You said that you were seeing a bit of a cyclical downturn in the landing gear business and maybe some seasonality washed into this quarter.

Do you expect that to go away starting in Q1? Or should we see may be a slow ramp back up from the space going forward?

Yes. This is Tim. We see the summer is actually the toughest month in the hangars. All of the operators want to have their fleet deployed as much as they possibly can. But we see really the aircraft starting to come back into the hangars mid second quarter, and then ramping up to the balance of the fiscal year.

Also in the September/October time frame, we have access to an additional hanger in Lake Charles. We have some good customer interest in that, so that also contributes to our optimism for the second half of the fiscal year. We are training our workforce now in anticipation of some of the work that we have scheduled for Lake Charles, and so we're optimistic that it's going to turn into a successful operation.

Okay. Great. Thanks. That's all I had.

Stan Mann, Mann Family Investments.

Yes. A prime question I have is on your expectations for use of cash in 2015. You did mention debt reduction, but what about M&A possibilities?

Yes. So the M&A pipeline is a fairly robust for us at this stage. We do feel pretty good about our ratios and financial position today. So we may be looking for ways that strengthen our supply-chain business during the upcoming period.

Great. But you do have opportunities or targets that exist.

We do.

Okay. You mentioned obliquely the possible sale of any of your businesses. Is that something --?

Stan, to be more precise what I've indicated is that we've had certain underperforming businesses that we will solve this fiscal year.

Okay. So that means you possibly could have operating margin improvement?

Yes.

Okay. Very good. Thank you very much.

Thank you for the question.

Larry Solow, CJS Securities.

Great. Thanks. Just a couple quickies. On the trading and the parts business, what's the recent trends, pricing been in that piece?

I would say fairly consistent with historical pricing. It's steady, and it's -- been pretty decent for us. We are seeing our in returns improve in that business, and we anticipate our returns will continue to improve in that business.

The market is fairly bullish. It's a fairly positive market environment for that business today.

Right.

I think we've done some smart things in positioning the Company in a more international way.

Okay. And then you've touched on Lake Charles. Is that -- I guess just starting to ramp, and I guess part of the increased focus on the wide-body, is that supported by Lake Charles?

Yes. -- Larry, it's Tim. Yes, it is. That would be our main wide-body operation. We have a couple of aircraft in there now. But we do expect the Lake Charles facility to be busy as we get into the second half of the fiscal year.

You expect that to be profitable this year for the full year?

We do.

Okay. Great.

But we also do wide-body in other places on our network, but Lake Charles will be well suited for it.

Got you, and then just last one on the tax rate -- I like the precision there with the 32.7%. Is that ballpark, is that lower number maybe not exactly that, but is that a sustainable number going forward or do you have some of these --

We went back, Larry, and we actually went back more than five years, but if you look back over the last five years, we feel that that's a comfortable rate that we have achieved year on year. I mean, we look specifically at what we're looking at for next year and triangulate that.

Got you, and then going out in the out years, is it hard to say?

Well, I think -- if history is any indicator, we think that's a good number.

Okay. Great. Thanks.

I am not showing any further questions at this time.

Okay. Thank you for your participation today, and hopefully everybody has a nice day, including our share price. And I just want to leave everybody with the impression that the Company we are working hard to increase value and very focused on executing and delivering value to everybody. So thank you for your participation.

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