AAR Corp (AIR) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AAR's FY15 third quarter earnings 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 the Risk Factors section of the Company's form 10K 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. You may begin.

Good morning, thank you and thanks to all for joining us here today to discuss our third quarter FY15 results. As you can tell, a lot has been going on at the Company, and I'm pleased to announce we've completed several strategic initiatives for the Company and we continue to work on other fronts as well.

So we finalized the sale of the Telair Cargo Group. The proceeds we received last week were $705 million. We have $20 million that's in escrow awaiting determination on a particular program and the results from that particular program.

We refinanced last week our revolving credit facility. We upped availability to $500 million, and we got improved terms. We now essentially have taken anywhere from -- let's call it 25 basis points to 75 basis points depending on level and where we're at in terms of cost interest rate reduction on that facility.

We commenced this morning the redemption of our $375 million high yield notes. Now we will pay a make-whole, but the annual interest rate savings by doing this is about $23 million per year.

Earlier in the quarter, you saw where we announced that our Board has authorized the purchase of $250 million worth of our shares. We also announced the two segments that we will be going in the market with. The one segment, aviation services, will be comprised of our supply chains and MRO businesses, and our expeditionary services businesses will be our airlift and mobility businesses.

We continue to see growth, solid growth in our aviation service businesses. I believe sales, I believe we've communicated sales increase of just right around 10%. I think it was 9.9% to be precise and over 30% growth in our gross profit margins.

The parts business is particularly strong. The MRO business is improving, and you may recall within MRO, we have our heavy maintenance.

We have component maintenance, and we have landing gear maintenance. We're seeing good improvement -- notwithstanding competitive pressures, we are seeing good improvement and results coming across that group of businesses.

As you can see, our airlift business as we've discussed in the past is more or less in transition mode. The last year at this time, we had -- we started last year's third quarter with 35 flying positions.

We ended last year's third quarter with 25 flying positions. Today we have 19 flying positions, and we expect to be at 21 by the end of our fiscal year.

And you can see, so we've had a little bit of rotation. We've had assets coming out of Afghanistan. We've been successful in redeploying some of those assets into the DoD down in Africa, and we also recently won our first UN contract.

Don't get too excited on the UN contract from a profit contribution vantage point as much as what it may mean in terms of opportunities for the Company. We will be the first US operator operating for them at least in recent history, at least in recent times, so it was a win that we've been working on for quite is some time. It's only one asset at this time, but it is directionally I think a good indicator for our Company.

We are in the process of selling certain assets that we no longer are looking to reposition. We had some assets that we classified for sale that we actually pulled back into inventory because we think there's a pretty good opportunity of placing those particular assets. On the assets we have for sale, we expect to sell four of the assets in this quarter and hopefully close from a cash standpoint as well.

So when you look at the businesses in Q3 in their composite, sales were down 5% when you consider from an ongoing basis, from a going forward basis, but when you consider the reductions that we've had at the airlift operation in this quarter on a year-over-year basis, I think you can see that it was actually a pretty decent quarter for the rest of our businesses. We will attempt to walk you through what the businesses would have looked like had we not consummated the sale so you can get to some apples-to-apples comparison.

So you can see we reported $0.05. When you take into consideration all of the one-timers including adjustments for interest, the one-time adjustments come out to about $0.12.

If you look at the airlift quarter on a quarter basis, if you look at the change on year-over-year basis, it's about $0.15. When you look at Telair, it's about $0.15. That would bring you up to about $0.47, and then when you back out the losses from ANIS, about $0.08 it would take you up to around $0.39.

So that's our best effort at a reconciliation. We are entering the fourth quarter. I would say and as you look at -- fourth quarter will also have some noise. The noise will be a $200 million gain from the sale of Telair businesses.

We will have a charge off for the make-whole on the high yield notes which we've communicated, and there may be certain other things that happen as a result of our efforts to come into a new year with a nice, fresh look at our business. So we feel we're in a good position with our businesses, the supply chain MRO businesses. Think of those businesses as being after market, independent after market providers.

We believe we have at least in North America a very solid leadership position in these markets. We're looking to expand more internationally and looking at various different spots as we've done in the past.

Our expeditionary businesses, which are really more or less tied to supporting US and other friendly governments activities outside the United States, those businesses, mobility seems to be relatively stable. And airlift as I've indicated has gone through a series -- has gone through a transition out of Afghanistan, but there are other fair amount of opportunities that we are looking at. So the pipeline is strong, and we've talked in the past about one particular large program which continues to be out there for the Company.

On the balance sheet, one more time, we feel really good about how the banks view these moves. And the feedback they gave us which shows up in terms of improved terms on our revolver I think speaks volumes to what we're doing, and I think in general, we feel pretty good about where we stand.

So I think with that, let me open up the call to questions that you may have.

(Operator Instructions)

Our first question comes from the line of Robert Spingarn with Credit Suisse.

Good morning.

Hi, Dave. Couple things. With regard to airlift, and the modest decline, negative margin in the quarter, is this the breakeven level 19 positions? How do we think about that?

And I think last quarter you answered a question, you thought you had 100% visibility into 23 positions this quarter. We're obviously behind that and/or below that level, and it just seems like this business is either slower to recover or something is tough to see. Could you explain or frame the visibility that you do have?

Yes, I think the business has been a little slower to recover. Keep in mind now I believe part of those 23 were also the two that we have coming online later this year with the placement of two aircraft with the British Ministry of Defense against a 10-year contract. So I think it has been a little slower to recover than we had hoped.

We have had a series of protests around certain wins that we've had, and we've had a couple of programs that have been a little longer to materialize. But again, Bob, I would say that we feel good about the business. It's unfortunate that we had such a good year last year I guess and the comparison is a little bit difficult, but we will -- you will see improved results coming out of that business.

So at this, are we at a breakeven level? Are you close to where is 19 the number there, and what's the cash profile here? Is this business cash flow positive at this level?

Yes, so the business has historically been extremely cash flow positive, so it's generated a fair amount of cash for the Company. At current, it's relatively flat from a cash flow standpoint.

We will generate cash from the sale of the assets albeit in the $11 million to $12 million range. And we will, we do anticipate that we will probably this quarter be a net investor, but the business should be generating positive cash out into 2016.

Okay and then just the last thing. Could you give us a rough mix of what, within expeditionary the airlift versus mobility, just an updated mix?

Yes, call it 50/50. It's a little bit more airlift than it is mobility, but approximately let's call it 50/50.

And profit wise and cash flow wise, how do we think about those two pieces?

Well -- so there's a lot of different ways of looking at these businesses. If we look at them snapshot wise, we're getting more cash coming out of mobility.

If we look at it from a -- let's call it a five year horizon, they've both been very strong profit contributors to the Company. Airlift at its peak would contribute far more cash than mobility, but mobility at its peak also contributed a fair amount of cash.

Okay thanks, David.

Both by the way, they are both leadership positions in their respective markets, but both markets I would say are going through airlift a little bit more of a transition because of the heavy dependence we had on the Afghanistan market. But both businesses are leaders in their respective markets.

Right, thank you.

Our next question comes from the line of Larry Solow from CJS Securities.

Good morning. Just touching on airlift again, just in terms of -- so you positioned down about 20%, but revenue was down 45%. Is that or was that -- the expeditionary services drop in revenue, was that all airlift or was there continued drops in mobility? That's the first question.

A little drop in mobility but mostly coming out of airlift.

And is that -- the positions are down and I guess the ones that remain, I guess there's less flying hours too. So does that explain why it's down?

Yes, less flying hours. And what we had -- as you will recall, Larry, we had the F92s in prior periods. The F92s were huge contributors because we billed more for them and they flew more, and the F92s are now parked looking for a new home.

Okay, and what's the outlook for mobility? Is that you think reaching a trough and flattening?

I would say you will have periods where it will be a little bit stronger and periods where it will be a little bit weaker, so it's bouncing around. It still has a nice profitability. It's still a profitable business, but I would say it's giving us a good return on capital, so it's just bouncing around.

And now that the Telair deal is closed, I know you had a couple of capital structure initiatives. Any clarity, any thought on how you view share repurchases?

Yes, it's definitely in the mix. So it's really just we're just trying to get our thoughts together and figure out the best approach.

Okay, great, thanks.

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

Yes, hi, thanks for taking the question. Just to go back David to your commentary surrounding free cash flow, I guess you talked about being a net investor in terms of cash in Q4. Was that specifically geared towards the airlift business or the business overall?

I would expect the business overall to be cash flow positive in Q4.

Okay, got it.

I think we have certain challenges around airlift as we position assets. So every time we win a contract, we have to put some investment, minor investment relatively so, but still investment in the assets and a push off start date on the assets as well.

So I think Q4 for airlift because of the sale of the assets we have pending, I would expect from all-in, I would expect it to be cash flow positive. From an operating vantage point it may not be.

Okay, got it. And in regards to the aircraft numbers within airlift, I think you said four are expected to be sold in Q4. How many are up for sale right now?

There's 12 available for sale right now, so we last reported to you guys the number was 16. We had talked about potentially taking it up to 18, but we've actually returned some F61s to the active fleet for use in future missions. So we're sitting at 12 today.

Okay, got it. And then just one last one on airlift, I promise. When we talk about -- going back to Rob's question about where the breakeven is for this business, is there a number or is it really more predicated on the assets you have in Afghanistan and how heavily utilized they are?

Well I think it's a mixture of the number of flying positions plus the number of hours they're flying, plus the type of assets that they are. So I think at the point where we're at right now, we're at that point that you're talking about, that breakeven point. So I think that it's a mix of all of the above.

Okay and in regards to the new contracts that you're winning, we talked about UN being not as profitable as some of the legacy contracts. Can you win business that's comparable in profitability profile to some of the legacy stuff?

Yes, I believe so, yes. I believe that you may have, there was some very favorable pricing let's say at a stage in the Afghanistan buildup. That pricing is probably not available today, but I would say that we have better pricing opportunities that -- or equal to profit opportunities that we're looking at, yes.

Okay, great thanks for that. And just lastly for me, no real commentary from you guys just in regards to some of the MRO growth initiatives. So just curious what's going on, what's the latest and greatest in regards to the wide body growth initiative?

We're still working hard. I mean we had a tough quarter in Lake Charles. We had a lot of build up costs in Lake Charles during the period.

Notwithstanding those we still had earnings growth from the businesses. We would expect that we will gain more traction positive traction I should say this quarter than last, and we feel that we're out there trying to win more wide body business.

Okay, so gaining traction is just basically winning new customers?

Yes, and performing to our expectations.

Got it. Okay, thanks so much. Appreciate it.

Our next question comes from the line of Kevin Ciabattoni with KeyBanc.

Hi good morning guys. Thanks for taking my questions.

Sure.

Looking at the margin expansion in the quarter in aviation services, you talked about scope helping out there. David just wondering if there's anything else you can point to in a little bit more detail regarding margins the there and how you could potentially generate additional margin expansion in that business?

Yes, I think for the time being we're seeing -- I think we're mapping from scale, so our cost structure has stayed relatively flat, and we've had slight increase in costs in those businesses. But we've had nice progress in volume improvement.

So we're getting a little bit of scale working in our favor, but we're also seeing improvement in our landing gear business for instance. So we're getting more volume coming through that shop.

Our component shops are doing better, so I think across-the-board you're seeing improvements in operating. Now we did have a ding in Lake Charles. So Lake Charles was a negative contributor during the period, which is not unusual this early in the build up phase of one of our MROs.

So just touching on some of the sub businesses of aviation services, it sounds like yours is coming back as you expected and the trough looks to be in the rear view mirror there?

Yes, it's slower than we expected and not as steep as we hoped, but it is recovering.

Okay, and then in the press release you talked about using the new capital base to grow the existing businesses. What are you guys looking at now in terms of potential growth avenues, whether domestic versus international, MRO versus supply chain, any color you can talk about in terms of opportunities for growth?

Yes, so we're looking at the supply chain business has been exceptionally strong. We are playing around with a few different international activities.

You may recall last year, we acquired the inventory from Sabina Techniques. That turned out to be a very good move for the Company, very positive move. So we're looking at other opportunities along those lines, and the pipeline is pretty good.

Okay, and then last one for me and I will jump back in queue. Can you talk at all about the pace of the debt redemption and when -- I think you mentioned $23 million of annualized savings in terms of timing and cadence for that what you're expecting?

Yes, so we put out a -- I don't think it's called a tender, but we put out a offer to buy -- to redeem, a redemption I guess is the right word, a redemption on these bonds today, and that's a 30 day process.

Okay, great, thanks.

Our next question comes from the line of Dan [Mani] with [Mani] Family Investors.

Hello, Dan Mani. David?

Yes.

The use of cash that's come in, you identified the debt buyback. You've identified the stock potential buyback, and then there is you're generating cash flow continuously while you're operating. So are there any specific -- I know there's been some general questions but are there any specific plans to buy or add assets at all that you're close to?

I mean, there's always a possibility, right? It's the nature of our business is we're always looking at opportunities.

So in terms of close, it's hard for me to, your definition of close, Dan and mine might be different, but we have stuff in the pipeline. Let me put it that way.

Okay. In MRO, which seems to be a growing business and your prime assets, concentrated assets, the area that you aren't represented very much is international. So can we expect anything in international build out in MRO?

It's not for lack of effort. We have to find the right situation. I mean MRO has its subtleties like every business does, but going international is not as easy as it sounds because you're dealing with different cultures and different work habits and things of that nature.

And our view is that yes, we are interested in international MRO. We have gone down numerous paths with different local potential partners, none of which have materialized. But we are still out there stirring up the hornet's nest to try to find the right opportunity.

But you are involved. You're involved in Saudi Arabia or UAE on the buildout, you have responsibility for the buildout of an MRO facility I believe?

Yes, that's correct, but we won't be operating that facility. They're just buying our expertise on setting up the facility.

Okay, but you would not be operating it?

No.

At this point, is there a possibility?

No, that's the UAE government will be the operator. They procured certain capability from us that we're providing them.

Okay, so my last question on buyback, is there a legal period that you can start buying stock, the blackouts and times you can't? Can you define what the period that you could buy back stock or when it starts by SEC rules or whatever?

Well, there are rules and there are laws, and we will abide by every one of them. So it depends on the structure, and right now we're in a blackout.

You are?

Yes, because we tend to allow investors 24 hours or so to absorb the information. So yes, we will abide by every law there is.

Okay, but the period what I'm trying to get at, I understand when does it open up the possibility that you can legally start buying?

I think tomorrow.

Okay, well good luck. Thank you very much.

Okay.

Thank you. I'm showing no further questions at this time.

Okay thanks, all, for participating. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.