AAR Corp (AIR) 2017 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to AAR's FY17 first quarter earnings call. We are joined today by David Storch, Chairman, President and Chief Executive Officer; and Tim Romenesko, Vice Chairman and Chief Financial Officer; and John Holmes, Chief Operating Officer of Aviation Services.

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, 2016. 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 the AAR's Chairman, President and Chief Executive Officer, David Storch.

Good afternoon and thank you for joining us today to discuss our fiscal year first quarter results. As you can see, overall we had a very good quarter as diluted earnings per share from continuing operations increased 38%, from $0.21 last year to $0.29 in the current period.

During the first quarter we ramped up recently awarded programs on our aviation services segment, and we continued to win significant new business from both our commercial and government customers. And if I may I'm just going to highlight a few examples of some of our wins in the period.

We won contracts from both Enter Air and flydubai to provide power by the hour component inventory management repair services for more than seventy 737-series aircraft. The latter agreement represents a significant expansion of AAR's commercial footprint in the Middle East, and brings our total number of aircraft under management to over 1,200. We also signed an agreement with Asiana Airlines to provide landing gear repair services at our Miami landing gear facility. Further, we won a contract from CommutAir which operates on behalf of United Airlines as part of United Express to provide component repair and supply chain services for their fleet of 40 Embraer ERJ145 aircraft.

Our airlift business was awarded two additional rotary wing positions in Afghanistan. And in addition, the Military Sealift Command extended our four positions providing vertical replenishment services in the Indian Ocean and western Pacific. These awards bring our total contract positions to 21 aircraft as of the end of the quarter.

And of course most significantly, our airlift business also was awarded the global aviation support services contract of the Department of State Air Wing, otherwise known as the INL-A program. Our airlift will be responsible for operating, maintaining, and provisioning the current fleet of 140 airplanes and helicopters operating around the world. The potential duration of this contract is 11 years, including a 6 month phase-in. Incumbent contractor filed a protest on September 11, and we expect a decision on the protest no later than December 21.

At this point I want to thank you for your attention and I'll turn the call over to Tim.

Thanks, David. I'll discuss our first quarter financial performance in a bit more detail.

As David indicated we had a good first quarter. Sales in the quarter were $404.8 million, up 4.7% versus the prior year. Aviation services sales increased $18.8 million or 6% year-over-year, while expeditionary services segment reported a slight decrease in sales, although up from Q4.

Gross profit increased year-over-year for both segments. The gross profit margin in aviation services was 16% with the mix of products and services responsible for the increase. In the expeditionary services segment, the gross the gross profit was 11.5%, reflecting improved profitability in mobility products.

SG&A expenses as a percentage of sales were 11.1% for the first quarter, compared to 10.3% last year. As the SG&A expense run rate is about in line with our expectations, and we expect that the SG&A as a percentage of sales will decline closer to our target of 10% as sales increase over the balance of the fiscal year.

Looking at interest expense for the quarter, it was $1.3 million, compared to $1.9 million last year, and that's primarily as a result of the retirement of our remaining convertible notes during FY16.

Our earnings per share, diluted earnings per share from continuing operations for the first quarter was $0.29, compared to $0.21 in the prior year, and that's a 38% increase in EPS as David had mentioned.

Taking a look at cash for a moment, we used $500,000 of cash from operations for the quarter. In the prior-year first quarter we used $64.4 million. Capital expenditures in the quarter were $9.4 million, and depreciation and amortization was $14.9 million.

During the quarter we paid dividends of $2.6 million, and we also repurchased approximately 619,000 shares of our stock in the open market for a price of $14.8 million. And that leaves us as of August 31 with $67.9 million available under our board authorized share repurchase program.

Net debt decreased $7.1 million, and we ended with $143.7 million of net debt, and our net debt to capital ratio was low at 14%.

Our composites manufacturing business has continued to perform well, and as a result we decided to retain it within our expeditionary services segment, and we've reclassified this into continuing operations for all of the periods presented.

So finally at this point, we are sticking to our guidance of $1.30 to $1.40, and we feel good about the quarter that just ended, and we feel good about our outlook, but we're going to stick to our guidance at this point.

So thanks for your interest and I'll turn the call back over to David.

Thank you, Tim. So as you can see, first quarter of 2017 was a nice improvement, we saw nice improvement over the prior year. Our aviation service segment continues to exhibit strong growth, and our expeditionary services segment improved from recent performance levels.

Once again we ended the quarter in excellent financial position, giving us not just stability and flexibility but also capacity to go ahead and look to take advantage of market opportunities as they present themselves. We will continue to make investments in our industry-leading operations as we move into FY17 and I am excited about our future prospects.

At this time I'll turn the call back over to the operator to open up the lines for any questions you may have.

(Operator Instructions)

Larry Solow.

Great, thanks. Good afternoon. I was wondering if you could maybe on the aviation services side, looks like supply chain is doing really well. Big growth there obviously, adding more contracts and whatnot. Aftermarket, anything changing there? Anything in the trading business? And perhaps a better look just on the MRO side and what's going on there?

MRO had, as I think we've signaled in the past, MRO's results this quarter are the softest historically for the year, and they didn't disappoint in that regard this year; it was soft again. We -- to give you a sense of positions, we had on average, the middle of August we had about 33 positions, by positions I mean aircraft in the hangar for maintenance, and now we're running at 44 or, mid-40s, 40, 40-ish right now in September, and then we go up to 44 in November. So it will start ramping again as the year progresses.

The supply chain business as you say, Larry, is strong. We're seeing many opportunities. John Holmes is not with us here today in Chicago because he's out visiting with customers, trying to drum up some additional business and actually meeting with a customer in our New York facility today.

So we're hopeful that we can announce a contract after October 1 that we've been working on for quite some time, that's a pretty good size. And I would say around the [horn], the supply chain business is strong. The MRO has gone through its typical cyclical experience and strengthening, and we're feeling pretty good about where we are today.

So the MRO was more seasonality than anything else?

Yes.

And how about Lake Charles? I know there have been some headwinds there, can you maybe just -- ?

We've been diminishing our footprint there. We're keeping it open for now for some light paint type work. As we've discussed before, the state of Illinois has constructed a facility for us in Rockford that we're kind of pivoting towards, and hopefully we'll be generating some revenue and income coming out of that facility in the not too distant future. We'll keep you up to speed on that.

Got it. Just switching gears real quick on the expeditionary side, I realize it's sort of the world of small numbers, and if you go back three years ago, gross profit was leagues higher, but a pretty nice improvement from the sort of low single digits to 8 million this quarter, and you said that was mostly on the mobility side? I figured the airlift also improved a little bit from the ramp in the Falkland Islands?

Airlift has improved a little bit.

What about mobility; what's sort of your thoughts there?

Our thoughts are that we're seeing signs of life in both businesses, so we are seeing the inquiry level get stronger, and we're not overcommitting at this point. So let's see what happens. As you know the world environment is unsettled as ever and it's just a question of how much more action the US will see outside in these different theaters, and that will be a good proxy for how our businesses do.

Okay, on the INL contract, I don't know what you can or can't say. Thoughts on potential margin being at least accretive to your current margins? Or maybe just on timing, assuming the ramping starts up into early calendar 2017? Would that first six months be dilutive? Or how would that ramp play out on a high level -- ?

Why don't we hold off on making comments on the contract, it's in the protest period --

Okay, fair enough.

-- and I think we'll talk about it once it emerges out of protest.

That sounds great, thanks, David, appreciate it.

Kevin Ciabattoni, KeyBanc Capital Markets.

Good afternoon, thanks for taking my questions. Nice quarter. On the SG&A, obviously it was a little bit high in the quarter, 11% of revenue. In the press release you talked about some new business development efforts that drove that. Just wondering if there's any more color you can give on those? And whether there's specific areas or programs you can discuss?

Yes, so we've expanded our program selling capabilities. And I think what you're seeing here in some of these announcements is a reflection of their efforts. And we have a team of folks who joined us last year, and they're wonderful team. They complement our organization in a very positive way, and we're very hopeful that we'll continue to benefit from their efforts.

Also first quarter is always a little softer for us because of MRO sales, but we anticipate, our goal is to always to be below 10%, and our goal is to get down to that level before the fiscal year is out.

Okay, thanks, David. On the composites business, I would say bringing that back in under mobility, can you just remind us, was that under mobility previously or was it within the aviation business?

No. Before we had a manufacturing group of businesses, and that's where it was, and when we sold off the businesses and kind of restructured the manufacturing, we basically just stopped and looked to exit both the composites business and the metals business. We ultimately wound down the metals business, but the composites business which we were trying to sell, we weren't able to get prices that we were happy with, so we thought it was best, from the customers' perspective, for our people, et cetera, to go ahead and try to revitalize the business, and we've had some success in that regard.

So the business, based on how we see the markets unfolding, the leadership team at mobility is a very capable leadership team, as you know, and they were eager to take on some added responsibility, and they now have this operations part of their business.

Can you maybe touch on may be specific end markets are driving that revitalization that you mentioned? Are there specific markets you can point to where you're starting to see some traction there?

We've had success in the past and continue to have success serving some of the regional manufacturers. We've had some success on interiors for certain specialized aircraft. That business continues to be strong. So we're looking at opportunities to support the Boeings of the world, and the folks who support Boeing, as well as some of the regional carriers that are out there as well. So we're kind of like a niche-like business. We have some activity in the flat-panel world. I don't know, Tim, is there anything else to add?

That's pretty good. We're supporting some of the helicopter manufacturers. That piece of the business has been doing pretty well.

Is that mostly commercial or mostly military or a good mix of the two?

It's both but it's mostly commercial.

Okay, thanks. And then last one for me, I know last quarter you mentioned that the engineering services business had a pretty nice quarter. I don't think you specifically called it out this quarter, but maybe just some color on what you're seeing there? I think that tends to be a leading indicator for the broader overhaul market, so maybe just some color on the engineering business?

Yes, I think the engineering business has had a couple of wins. We had one out of Africa actually. The business is doing okay. It's got some opportunities that they're looking at, but at this point in time it's not a needle mover either way.

(Operator Instructions)

Stan Mann, Mann Family Investors.

Congratulations, a really good quarter. David, I have a question on priority use of cash as you generate. Would you say your emphasis is on buyback or acquisition or can you give us any color on what you think you've utilized for on a priority basis?

Yes. The first priority is to use our capital to grow our business, strengthen our franchise, and improve the depth of product that we offer to our customers. So that would be our first priority. Short of being able to increase the business in that fashion, and let me make that into a Part A and Part B. Part A of that is external deals, let's say acquisitions. Part B is funding existing capability. In the quarter just ended, for instance, we spent a fair amount of money funding inventory programs for our strategic customers.

Then nextly I'd say share repurchase would be next, and of course the board every quarter reviews our dividend, our dividend policy, and that's always discussed as well.

Can you comment on whether you are close to or see viable deals, accretive deals in what you're looking at now?

We're seeing deals that are interesting. We're not seeing anything that is compelling necessarily, but we are seeing stuff out there. There's a fair amount of stuff we're looking at. As you know we're being very selective and disciplined, but I would say the deal flow on the acquisition side is light to moderate, in a general sense.

Last question is, you almost won the State Department contract for their fleet. So let's assume we get that, do you see that as being accretive from the get-go, or maybe you can't comment because of the challenge?

Yes, Stan, so first of all we were awarded the contract.

Yes.

So we have a contract. The contract is under a protest. Under the protest, we were issued a stay order by the customer, or a stop order, so we are no longer working on the contract. But we do have a contract. In terms of the profitability or impact on the company's results, we prefer not to discuss that at this stage.

Okay, but it is a good contract for the company?

Well, I prefer not to discuss it. I think it's a contract, it's a program that we have a high level of confidence that, or we know we can deliver in a way that's superior to anything that the customer is accustomed to, and that's all I would say.

Okay, but in quantity, in dollar volume, you can comment? Potential dollar volume? Contribution?

I think the State Department put out a release which indicated a potential value up to $10 billion.

Yes, that's pretty good, okay, thank you very much. Good job.

Okay, thank you.

I'm showing no further questions or comments at this time.

Okay, well once again thank you for your participation and I wish everybody a very good day. Take care.

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