AAR Corp (AIR) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to AAR's FY17 first quarter earnings call. We're joined today by David Storch, Chairman, President and Chief Executive Officer, and Tim Romenesko, Vice Chairman and Chief Financial Officer.

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 would like to turn the call over to AAR's Chairman, President and Chief Executive Officer, Mr. David Storch.

Thank you very much and good afternoon, and thank you for joining us to discuss our second quarter 2017 results. Let me begin by just saying that John Holmes is not here with us in Chicago today, he's out on assignment trying to make us some money. So we will try to answer questions related to his area more specifically.

Before we begin the recap of the quarter, I'd like to say how proud we are to have been awarded the Worldwide Aviation Support Services contract by the US State Department. We are very pleased that the GAO found no merit to the award protest filed by DynCorp, and that it stands by the State Department's decision to reward AAR the contract. We do believe and we see where DynCorp will be fighting some more on this contract.

We feel at this stage it's, as we have along the road, fairly frivolous. But we will fight them every way along the way and have a lot of confidence in the State Department's decision and a lot of confidence in our ability to bring value to the State Department.

The GAO decision clears the path now for AAR to assume operations. In the coming days, we will work with the Department of State to establish a transition plan for INL/A. While we do not have more to share at this point, we expect to be in the position to provide further details of the transition timing as well as guidance during our next call.

Now back to Q2 results. We had another solid quarter, as diluted earnings per share from continuing operations increased 35% from $0.26 last year to $0.35 in the current period. Although revenue was down 1.8% or $7.7 million for the quarter as a result of two significant items, one is the case of the KC10 wind down which we've discussed before. And secondly to drive more profitability through our MRO operations we are transitioning our Lake Charles facility from a comprehensive MRO provider to a more limited operation providing principally only painting services.

As we continue to expand our MRO footprint, early this month, we had our grand opening for Rockford, which is our sixth MRO. Construction is designed to allow us to maintain every commercial aircraft up to and including the A380.

For those of you not familiar, Rockford is about a 90-minute drive from downtown Chicago. It is accessible to a very large labor pool, and we're very excited to have this facility here in the state of Illinois.

The facility was funded largely by the state and federal government, and some local bankers in Rockford kicked in as well. We have a very favorable lease agreement, and we're very excited to move into the facility and start doing work for some new customers.

Overall, our aviation services business have continued to perform well and we captured several important contracts during the quarter. For example, we signed a five-year agreement valued at $125 million to provide power by the hour and component inventory management repair services to South African Airways Technical, or SAAT. The agreement with SAAT represents a significant expansion of AAR in Africa.

And this win was largely due to the effort of our new President of AAR Africa, Cheryle Jackson, who has been working at the Company since 2010 and President of AAR Africa in the last year, and this is a very meaningful win for the Company. The Company has solidified its position in Africa the last few years, including signing its first power by the hour component inventory management and repair services contract in 2014 with Kenya Airways to support their fleet of 737s.

We also entered into a long-term contract with New Zealand, Air New Zealand, to provide nose-to-tail cost per flight hour, rotable inventory support covering a wide range of parts for their 777 fleet which they have 15-777s that they operate. This contract represents AAR's first power by the hour agreement solely focused on the 777 aircraft, and complements our other programs in the Asia-Pacific region.

This additional contract also brings our total number of aircraft under management to over 1,300 aircraft. We signaled before we have made a significant investment in the BD capability around soliciting for more of this type work, and we expect to be more successful with programs as the year materializes.

During the quarter, we also expanded our distribution relationship with [Ethan] to include certain product manufacturers as aerospace groups fuel and motion control systems divisions, and now includes refueling subsystems, fuel pumps, door and landing gear actuators, secondary flight control systems and piece part sub-assemblies.

Overall, I'm very pleased with our progress during this period. The INL/A award is very meaningful, and we look forward to working closely with the Department of State to improve their operating efficiencies as we have done consistently for other government agencies and airlines around the world.

I will now turn the call over to Tim to discuss the financials for the period.

Thanks, David. I will discuss our second quarter financial performance in a bit more detail.

As David mentioned, we had a good second quarter, with earnings per share of $0.35 compared to $0.26 in the prior year which was a 35% increase. Sales were down slightly, as David mentioned, due to the KC10 and the Lake Charles transitions. Our expeditionary services business experienced increased revenues of $5.2 million or 7.2% versus prior year, and net income was up by $4.1 million in the quarter.

Gross profit in the aviation services segment decreased $2.2 million or 3.8%, driven by the lower sales volume and the KC10 program wind downs. Gross profit in the expeditionary services segment increased $9.3 million, with improved profitability across both businesses.

SG&A expenses in the quarter increased $3.2 million, reflecting an increase in investments in business development activities. Interest expense for the quarter was $1.1 million compared to $1.5 million previously in the previous period as the result of the -- primarily as the result of retirement of our remaining convertible notes. CapEx in the quarter was $9.5 million, much of that around technology investments across the Company, and depreciation and amortization was $14.3 million.

During the quarter, we paid dividends of $2.6 million or $0.075 a share, and the average diluted share count for the quarter was 34.1 million compared to 34.6 million in the second quarter last year. As of November 30, we had $67.9 million available under our Board authorized share repurchase plan. And during the quarter, we reduced our net debt by $3.4 million compared to the first quarter while continuing to make investments in working capital to fund the sequential sales growth and also invest in assets to support our new programs.

Finally, we entered into an amendment to our revolving credit agreement which extended the maturity of this agreement to November of 2021, and modified certain provisions, including the elimination of the material adverse change covenant.

So now I'll turn the call back over to David for final comments.

Thanks, Dan.

If I may, just reflecting back on the period and where the Company is today and where we're headed, I'm very pleased with our ability to expand our geographic footprint. You saw some of those as evidenced in the contracts we have recently secured.

I'm very pleased with the product range. We've gone ahead and expanded the product types of inventories that we are selling to our customers. I am also pleased with the range of customers, and the INL/A contract is a significant move for us into the Department of State, and we're just coming out of the period feeling really good and entering our second half with a lot of momentum.

So with that, let me open it up for any questions.

(Operator Instructions)

Larry Solow, CJS Securities.

Good afternoon. David, you sound obviously pretty positive, things sound like they are going pretty well. Just curious on the KC10, is that wind down occurring any faster than you thought or is that in line with your thinking?

No, it's pretty much in line with what we thought. Last year was -- so what we communicated after we lost the contract was an average of what the business had produced over a prior three-year period, and then we recently signaled what it's performed over the last year. And the last year was actually one of the stronger years that we have seen in some time.

So when you do comparisons year over year, there is obviously a negative comparison. So it will continue to wind down in Q3, and there will be some minor tail in Q4, but very insignificant.

Okay. And just on the Lake Charles piece too, I think the shift out just to the painting, you've talked about that for several quarters. I suppose that that piece has never actually turned profitable, so maybe it's just an impact on revenue but not on (multiple speakers)?

Yes, that's a good way to look at it Larry. So we took our actions. We have always struggled with profitability there, and we just decided once we were able to come online in Rockford that there was no reason to continue chasing that business the way we had been. So, yes, we feel good about that change from an earnings efficiency standpoint.

Got it. And just on the -- I fully expect you not to be able to comment too much on the INL/A contract. But it sounds like you expect maybe DynCorp is not done yet though in terms of protesting or appealing, or it may not be -- so we may not know for a little bit on (multiple speakers)?

No, actually so let's just to clarify that. So the State Department awarded us the contract back on September 1, the GAO reviewed the -- and DynCorp promptly filed a protest, which was fully expected. The GAO considered their protest and denied the protest, which in essence starts the process between ourselves and the State.

Now at the same time, they have further -- DynCorp can now go to the Court of Claims or something like that, Federal Court of Claims to pursue their claims. But obviously, Larry, listen. It's an important contract to DynCorp, it's important from a standpoint of their solvency from all appearances, and they are going to keep fighting and they're going to fight until they can't. But I think it's been pretty clear that the customer's made their selection. The GAO has gone ahead and upheld the customer's selection.

We feel very confident that our solution set is unique and superior to anything that anybody else can offer. We were able to blend in best practices from across our network of things that we do as a Company, and I think the State Department saw value and the GAO basically affirmed that.

So Dyn is going to continue I believe down a frivolous path. And we're fully prepared to defend our position and the work we have done, and look forward to supporting the State in a way that the State we believe that they will be very satisfied with their selection when they reflect back a few years down the path.

Great. And just lastly on the expeditionary services outside of that contract. A second consecutive obviously bouncing off of the bottom and far below where it was a few years ago, but a nice little improve if you look sequentially over the last few quarters. Is that being driven by -- it sounds like both segments are improving a little bit, the Falcon Islands contract is ramped up. Any thoughts on that, and then on the mobility side would be great? Thanks.

Yes. So the mobility businesses has a little bit of momentum. The airlift business, we're doing a good job watching our expenses and we created and we share with us a while back ago a trading operation down there and we've had some success down there with being able to move assets. And we are competing for new positions, and we feel pretty good, and of course the team is very excited with the win of the INL/A contract as well.

Got you. Great, thanks. I appreciate it.

(Operator Instructions)

Shannon Burke, Gabelli & Co.

Hello, good evening.

Hello, Shannon.

So just on the aviation services decline, I'll touch on Larry's question. How quickly do you expect the decline and the wind down of the KC10 to be offset by new program gains? I know you called that out in the press release, but will it start to pick up?

Yes, I would say by the fourth quarter and first quarter you will start seeing the gains from programs offset the losses from KC10. And then once we start the revenue stream from the INL/A, we will be way past whatever sales declines we have from the KC10.

Right, okay. Thank you for that. And then, is there any progress on an announcement for a Rockford facility tenant, or is that still expected to happen in December?

So we're working very hard, December at this stage, probably not. We've had some drop in work. We've performed some maintenance work for a couple of customers. We are in discussion with a few different carriers. We maintain confidence. We don't start paying rent until we have a base load customer, so we're out there aggressively talking with people.

We have hired our first 30 group of mechanics, and we're in the process of interviewing more and we're hoping that we can be up to work as early as the middle of January, maybe February with some business. That's the expectation -- that is what we're hoping for at this stage.

Okay. And then that would convert into revenue pretty quickly then, I'm assuming?

Yes.

Okay. And then just on the expeditionary services segment, with the Trump administration coming in and he is really focused on reducing costs and watching spending in the DOD budget, have you seen any activity from potential customers or what is your viewpoint? Because this obviously would be a great benefit to AAR.

So my view is that we offer alternative solutions for the government and typically our solutions are lower cost in nature, and we're fairly optimistic that as the needs continue to grow and the pressure comes to contain costs that we're in a pretty good position. So it's a little hard to predict precisely how the behavior will unfold come January 20, but we think we're in a good position to benefit from the at least from the signals that we are seeing so far.

Okay. Great, thank you so much.

Thank you, Shannon.

Speakers, I am showing no further questions. At this time, I will turn the call back over to you, Mr. Storch, for closing comments.

Thank you very much. I would like to wish everybody a very happy holiday, and a new year filled with peace, happiness and a dose of prosperity. Be well everybody, take care.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect, and have a wonderful day.