AAR Corp (AIR) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to AAR's FY15 second-quarter earnings call. Before we begin, I'd like to remind you that the 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 New Year's release and the risk factor's section of the Company's Form 10-K for the fiscal year ended May 31, 2014. 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'd like to turn the call over to AAR's Chairman and Chief Executive Officer, David Storch.

Thank you very much, everybody. We started today with a sunny day in Chicago, but no longer. I want to welcome everybody to our second-quarter call. I'm sitting here with a room full of my friends and compatriots, but Tim Romenesko and John Fortson are with me and available to answer questions as we got into the Q&A section of this call.

Let me begin by saying that, on balance, we had a good quarter, far from great, but nevertheless, under all the conditions in which we are operating, we think we had a good quarter. In Aviation Services, we had a mixed bag. Within our Aviation Services segment, the supply chain sales were up 15% year over year, driven largely by strength in our program and after-market parts support business.

Our recently opened Brussels hub is performing well and allowing us to increase our market presence in Europe, the Middle East and Africa. We see continued strong demand for our unique supply chain services from airline and maintenance providers across the globe. Our defense logistics businesses is also seeing some positive impacts as a result of increase in flying hours on certain of the programs that we support. So, for the second half of the year, we expect continued double-digit, hopefully [inside] 20% year-over-year growth from our Aviation Services supply chain business.

MRO, we experienced year-over-year weakness, although sequential improvement, and we are entering the second half with strong bookings. So, during the period, MRO sales declined 11.5%; though, as I indicated, there was a slight uptick on a sequential basis and the year-over-year decline is largely due to lower engineering service work, which I believe we've discussed in the past.

We're seeing more customer interest in work at our newest MRO facility in Lake Charles both narrow body and wide body. And we expect the balance of the fiscal year we do expect sales growth in the mid to high single digits for our MRO business.

Airlift within our Aviation Service sector continues to transition. We, in the second quarter, sales were down considerably in the 40% range, as we had 17 aircraft under contract, as opposed to 40, back in May 2013. For the balance of the year, we expect continued year-over-year sales declines; however, we are working multiple proposals and are expected to hear and hopefully announce positively in the next 30 days or so.

Technology Products, we're seeing strength in our Telair Cargo Group. We had a 20% increase in sales on a year-over-year basis, driven by growth in commercial products, as well as deliveries of the A400M cargo systems. We expect continued strong year-over-year sales growth at Telair Cargo Group throughout the second half of the year. And the growth rates we expect should be equal to or greater than the 20% growth we posted in this quarter.

We continue to see reduction in our mobility and machine parts group, 23% reduction in mobility products and additional reduction in our machine parts business, as well. For the balance of the year, we expect declines of these units, but not at the rates we experienced in the second quarter of this year.

Final thoughts, as some of you may have seen a Thomson-Reuters article, it's not our intention to comment on that article, which -- I'd be -- you know, but at the same token, I have indicated in the past that we are looking at taking action or actioning underperforming units in our Technology Products segment. We continue down that path, while in same time, I believe we are performing the proper function by -- as we do always, performing ongoing evaluations of our business units towards a goal of streamlining and focusing our business and also improving our returns on capital.

So, with that, I'll turn the call over to my esteemed colleague, John Fortson, to fill you in on more of the details.

Thanks, David. I trust each of you had a chance to read our earnings release, and on this call I'll review a few key points with regards to our financial performance.

Our consolidated gross profit margin this quarter was 16%, down from 16.8% in the prior-year period. This performance translated into a 16.9% margin for aviation services and 13% for technology products.

SG&A as a percentage of sales in the first quarter was 9.6%; that's slightly higher than 9.5% in the prior-year period. However, in the aggregate, our SG&A expenses declined $4 million over the prior-year period, reflecting continued cost-control efforts across the Company.

Our operating margin for the quarter was 6.6%. During the second quarter, we generated $16 million in cash from operations and our capital expenditures were $8 million. We paid out $0.075 per share in dividends this quarter.

Net interest expense for the second quarter declined to $9.5 million from $10.2 million in the prior year. Our net interest expense numbers continued to decline as we focus on paying down debt. On a year-over-year basis, our net debt is lower by approximately $40 million. During this quarter, we retired $30 million of our 1.625% convertible notes.

Depreciation and amortization including amortization of stock-based compensation was $19.8 million. For the second quarter, our effective tax rate was 32.7%. Per our guidance in July, we expect it to remain at this rate throughout the balance of the year.

We ended the quarter with 39.1 million shares in the diluted share count. We did repurchased 70,000 shares at an aggregate value of $1.7 million during the quarter.,

Thank you for your attention, and I will turn the call to the operator for Q&A.

(Operator Instructions)

Larry Solow.

Good afternoon. I was wondering if you can comment, David, on the dramatic drop in oil prices. Obviously, helps your commercial customers. In terms of the dynamic with some of the newer aircraft that have been coming online, because there's more economic incentive, but now with the oil coming down so much, maybe some of these fuel-efficient -- the lack of fuel efficiency in the older aircraft, could they maybe stick around for a little bit longer? Would that directly help your business?

First of all, I think it's too early to tell. The oil prices have dropped precipitously here in the last 90 days or so. So, I'm not so certain that we have a trend yet. Clearly, our customers are benefiting from this global oil price rate. But, I'm not certain, at this point, that caused them to adjust their long-term fleet planning.

Now, that said, our business, as you can see, our business supporting the world's fleet is growing quite steadily and at very attractive rates. Keeping in mind, that all these growth rates are organic. So, I believe we're in a good position, expanding our business, I think, nicely. A suite of product that we offer in the supply chain arena, in particular are very appealing. I believe the spread we have now, in terms of capability of North America for airframe maintenance, is also quite strong.

So, yes, I think that the economic environment is more friendly today than it's been in a while for the airlines. And, as that continues, whether they take on new aircraft or not, I believe we're well-positioned.

Okay. You talked about some of the ramping of the aviation supply, some of those contracts. Can you comment how about the two contracts at Eaton and the one at Unison, are those still progressing in a positive direction?

Yes, Unison has been placed for a period of time and it's, I think, fairly steady. The Eaton programs are in their launch phase and still in a buildup phase. We're probably more of a net investor at this point in time than a net beneficiary. But, I would anticipate that as the other distributors work through their inventories, that we'll be in a good position to start seeing ramp in sales.

Okay. Last, you give some nice itemized guidance over the back half of the year. Putting it all together, and I know sometimes you put annual guidance and don't necessarily look to change it out if you don't have to. But date to say your full-year outlook is within -- where it's similar to what it was last quarter?

Yes. I think, as we sit here today, we don't see anything different from what we saw at that point when we adjusted earlier in the year.

Okay. Great. I appreciate it. Thanks.

Tyler Hojo.

Good evening. I totally understand you don't want to comment on the Reuters report. David, you did tell us that you would be willing to update us on some potential divestitures, I think, towards the end of the year. What I'm wondering is, it seems like cargo-loading systems and the Telair acquisition, in general, has been one of the better performing assets that you bought. Is there any reason to think that that's not a core, in terms of what AIR does going forward?

Well, I think everything we have in our portfolio today is core. We are viewing all of our businesses as core. I think we're looking at, how do we go ahead and maximize our investments. So, I think we're performing normal functions in that regard. We will continue to do so. So, I don't see any change in that regard.

Okay. That's fair. Then in regards to aero structures and the initiatives there, I know the strategy was trying to improve the operational efficiency of those assets and then try and determine what to do with that business. How have those businesses been performing? Is it -- are we back into the profit range now or still where we were?

I don't believe we've seen much change in those businesses. So, it's a little bit frustrating from our side. But, as I indicated, by the end of the year, we should be in a position to talk more specifically.

Okay. Got it. Then, as it relates to your prior guidance. I think you were looking for your airlift business to grow to 23 positions in the third quarter. Is that still the expectation?

Yes.

Okay. Got it. How much visibility do you have into that?

I think 100%.

That makes it easy. Good. One follow-up on the last questioners line of questioning, in regards to oil. What are you seeing -- with the drop in oil, I'm assuming your ability to benefit from the surplus parts market becomes a little bit more challenging. What's your view on that? Also, as it relates to your leasing portfolio, what do you think the implications are for asset values, there? Does that potentially get you thinking that maybe you will look to sell a few more of those assets in the back half of the year?

First of all, I view the reduction in oil prices, right now, as a positive. I would be hopeful that the price level will settle. If it settles in the range of where we are today, I believe that's very positive for our industry and for ourselves. It's a little bit difficult, knowing -- it's a little bit difficult to pinpoint where oil prices may fall. But, nevertheless, I believe that the state of the airline industry when oil prices were in the $100 range were very positive. And I think with the price -- the barrel being in the $55 to $65 range, it's even that much more positive.

So, I look at the industry, I look at the US commercial airline industry as probably being the healthiest it's been since I've been in the industry. And it's helping us think through our strategy as we look at how well they're doing and what their prospects look like. So, I hope I'm answering your question.

In terms of values on inventory, we are getting -- we are able to make good investments. We've made some solid investments this quarter while we still generated cash from ops and free cash. So, I believe that we have our tentacles out in the worldwide market, and I think we're in a good position to benefit as fleets grow and as fleets change. Yes. I think oil is just -- the price of oil I think is contributing to what was already a fairly conducive environment for the things we do.

Okay. Thanks a lot for that. Appreciate it.

Kevin Ciabattoni.

Hey, good afternoon, guys. Real quick on airlift, I know -- if my numbers are right, you finished last quarter at 19 positions, and it was, if I heard correctly, down to 17 at the end of Q2 here. Wondering if that was unexpected drop? I know you said you still expect to get to the 23. I was curious if that was baked in, because I was under the impression it was going to stay fairly flat.

Hey Kevin. It's John Fortson. So we did have two aircrafts that were de-scoped that were not anticipated. We technically finished the quarter at 17, but we've actually picked up two aircraft since quarter end, so we are back to 19. There's different geographies.

Afghanistan?

No, it's in a different geography.

Okay.

Look, we are tracking these, obviously, very, very carefully. The two that came out were not expected. But, we've actually had two incremental wins.

Okay. That's helpful. Any update on the aircraft held for sale? I think it was 15 at the end of last quarter? Just wondering if you guys have made any progress there?

We are sitting at 16 right now. We have had some progress. We haven't actually sold the aircraft. We think we're getting closer on a couple, and we feel like we'll get some out the door by -- in this quarter.

Okay. Perfect. I know it's not a huge piece of the business, but engineering services, wondering if you can give us some color on how you think that shapes out in the back half of the year? It's one part of the business we didn't really talk about, the impact of oil prices yet. But I would imagine, carrier profitability improves, maybe the cabin reverb environment picks up a little bit and you guys can see some pick up there?

This is Tim, Kevin. We are working off a few contracts that we have now, but we are taking steps to broaden our customer base and engineering services. We have a couple of programs going on in Asia and a few programs in North America. But, as you know, they are very lumpy, and the programs that we have today are smaller than the ones that we were working on a year ago. So, we are investing in some resources, now, to be -- to have more exposure to some of the major reconfigurations, interior reconfiguration programs that are going on. We are seeing some opportunity out of our Lake Charles facility, where we can do the touch labor.

So, hopefully, by combining our touch labor capability, as well as our engineering services capability, both in North America and in Asia, we're hoping we are going to be able to capture some more business there. For the balance of the fiscal year, what we see now is roughly in line with what we had in the first half of the fiscal year.

-Thanks, Tim. Last one for me and I'll jump back in queue. Any way you guys could quantify the 47-8, how that -- the rate cut there, next year, it sounds like would impact to your business?

Well, it definitely has an impact. On the -- at the cargo system and spares level. But, we do have deliveries in the second half of the fiscal year, more so than in the first half of the fiscal year. But, the decline in production will over time, obviously, have an impact. And then also on spares. One of the variables though is the split, the mix between passenger and freighter. That, we -- it remains to be seen.

Okay. Thanks.

(Operator Instructions)

Stan Manny.

Hi, gentlemen. I have a couple of questions. One, David, on cash flow utilization, can we expect the emphasis on debt pay down or stock buybacks?

Both, at the right time. Right? In this quarter, we reduced some debt and we bought in some shares. So, I think we will continue to look at the best utilization for our cash, Stan.

OK, and I have a question that probably you won't answer. But, the equity price is active at normally great in this environment. Is there any comments or anything you would be able to say about that?

I believe that the shares are undervalued and represent a wonderful investment opportunity.

Okay. (Laughter) Thank you. Good job.

I'm showing no further questions.

With that, I like to thank you for your participation today, and I'd like to wish everybody a very happy and healthy holiday season. All the best.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.