AAR Corp (AIR) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the AAR's Fiscal Year 2018 First Quarter Earnings Call. We are joined today by David Storch, Chairman and Chief Executive Officer; John Holmes, President and COO; Mike Milligan, Vice President and CFO; and Tim Romenesko, Vice Chairman.

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 news release and the Risk Factors section of the company's Form 10-K for the fiscal year ended May 31, 2017. 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, and good afternoon, everyone. Thanks for joining us here today. With me in Chicago, we have Mike Milligan who joined the company September 1. Mike is our new CFO, and he'll introduce himself a little further in this presentation. Very excited to have Mike joining the team and counting on great things coming from Mike in his -- as he gets -- familiarize himself with our industry and the company. He's off to a good start and working very closely with Tim Romenesko. Tim, as we discussed before, also here with me in Chicago, will be retiring December 31. And I can't say enough good things about Tim. He's just been a real strong force here at the company and a great business partner to many of us here. And although he will be retiring, he will still stay engaged with the company for a minimum of a year post his retirement. Also here is John Holmes. John, as you recall, was named President and Chief Operating Officer on June -- effective June 1, and he recently joined our board. So a very strong team here. And we'll all be available to answer any questions that may come as a result of our opening comments.

Now turning back to the quarter. As you can see, we had a solid first quarter. Diluted earnings per share increased nearly 11% from $0.28 last year and $0.31 in the current period. First quarter sales were up 8.5% for the quarter, with sales within Aviation Services slightly above our long-term target of 5% to 10% growth. The growth was even more impactful when taking into consideration the wind-down of the KC-10 program, which contributed $26.9 million less than the prior year sales.

We're especially pleased with the performance of our industry-leading, integrated supply chain businesses. And during the quarter, we announced significant new business wins for this group of businesses, including a long-term contract awarded to us by Hawaiian Airlines to support their new Airbus NEO aircraft. We've had a long-term and long-standing relationship with Hawaiian and very excited to expand this relationship to support their new fleet of 18 321 NEOs. A very exciting airplane for them and a very exciting program for us. It gets us on to new technology Airbus platform, and we're very excited about those prospects.

We're also awarded a long-term contract to provide comprehensive flight-hour component support for 100 new Boeing 737 MAX aircraft with flydubai, which is expected to commence in October 2017. This is our second significant supply contract for flydubai. You may recall last year, we announced the PBH program for 60 737 NEO's in support of flydubai. We're very excited to grow our business with them as they've proven to be a successful regional carrier and the first MAX operator in the Middle East. So both of these contracts have meaningful, meaningful relationship to -- deepening our relationships with both of these important customers but also meaningful in terms of providing an entree for us to support these newest-generation aircraft, which have had good success in terms of sales rates coming both from Airbus for their version, which is the A320 family; and for Boeing in their 737 family.

Lastly, during the quarter, our Aviation Services businesses received a Notice to Proceed on the 15-year, $900 million Landing Gear Performance-Based Logistics One program with the U.S. Air Force, which we had previously announced. For this program, we are providing total supply chain management, including inventory logistics and repair services, to support the Air Force requisitions received in support of all their C-130, KC-135 and E-3 landing gear requirements. And the -- this program is expected to commence next April.

Finally, earlier today, you may have seen that we announced the acquisition of 2 MRO businesses from Premier Aviation in Canada. Simultaneous with this acquisition, we announced a new long-term contract with Air Canada for airframe maintenance on their narrow-body fleet and a regional fleet of aircraft. These airframe maintenance services will be performed in our newly acquired Canadian facilities. The total value of this contract is approximately CAD 500 million. This is not all incremental because we are currently doing business with Air Canada, and we'll know shortly -- we'll be able to communicate shortly what the impact is in terms of growth. But it's a nice increase in business with Air Canada.

And with that, I'd like to turn the call over to Mike so he can give you a little bit more color on our financials. So Mike?

Great. Thanks, David. Good afternoon, everybody. It's a pleasure to be here today. I recently joined AAR on September 1 after more than 30 years of financial experience in both public accounting and industry. Most recently, I was the CFO of a large private equity-owned equipment rental company that was purchased by the industry leader back in April. I'm excited and impressed with the AAR team at all levels and feel that the company is well positioned for growth in the future. And I look forward to working out with all of you in the coming periods.

I'll run through a few of the comments on the company's first quarter '18 financial performance, and then we can move to Q&A. As you can see in the release, we experienced strong sales growth in the quarter of $439 million, up 8.5% or $34 million from the same period in the prior year. These increases were driven by strong performance of our Aviation Services segment. Sales at the Aviation Services segment increased $37 million or 11% year-over-year, and the related gross profit increased $4.4 million or 8% for the quarter.

Notwithstanding how good we feel about the results, it should be noted that the operating income was down slightly year-over-year. In this year's results, we incurred $1 million of non-recurring costs. And in last year's results, we recognized a $2.6 million gain from the sale of a product line in Expeditionary Services.

Normalizing our performance would show a 20% increase in operating results year-over-year. Consolidated net income was up 11.5% to $10.6 million year-over-year. Our income tax was favorably impacted in the quarter by adopting a new amended -- the new amended accounting standard for stock-based compensation. That impact was a $1.2 million favorable amount. Our capital expenditures for the quarter were $8.2 million, and depreciation and amortization for the same period was $14.6 million.

During the quarter, we paid dividends of $2.6 million or $0.075 per share. We repurchased 142,600 shares in the quarter at $5.2 million. Our average diluted share count for the quarter was 34.5 million compared to 34.2 million in the prior year and reflected increases of option exercises and additional grants, offset by the reduction of more than 600,000 shares that were repurchased year-over-year.

With that, I'll kick it back over to David.

Okay. Thanks, Mike, and once again, welcome to the company and great job there. Appreciate it. I'll just end by saying -- I'm sure you recall that historically, first quarter is a relatively soft quarter compared to others in that the airlines have most -- the aircraft are flying. Demand is pretty high in the summer months. And historically, this has been a softer quarter than other quarters, but still, nice increase over the prior year.

So I'm -- and I feel good about the progress we've made during the quarter. I feel good about the acquisition that we announced this morning. But mostly, I feel really good about our leadership team and the momentum this team is generating as we come into the second quarter of our fiscal year.

So with that, thanks for joining us. And we'll open it up for any questions you might have.

(Operator Instructions) Your first question comes from the line of Larry Solow.

First off. Just on -- wish Tim best of luck. It's been a pleasure to work with you for the last 11 years, and...

Thank you, Larry.

Yes, absolutely. And then welcome to the company, Mike, and we look forward to continuing the relationship. Just -- first question. Just on the Aviation Services. Obviously, a really good quarter, 20% -- I think it's like 20%, 21% growth excluding the KC-10 loss, which we're aware. Was that -- I know a program -- the programs based on the distribution business have been growing like gangbusters, as evidenced by your aircraft under contract last year, the growth there. But did the distribution -- excuse me, did the trading parts business and the MRO businesses also pick up a little bit to help draw that growth? It's a pretty good growth.

Yes, we...

Yes. The trading sales were up $22 million and the commercial programs were up over $18 million.

Got it. Okay. So the trading obviously did have an impact. Is that -- that bump-up, is that -- was there anything in there that's sort of unusual or anything? Or...

No. This is John Holmes. It's not unusual. We've had a nice recovery, I'll call it, over the last 5 or 6 quarters in the trading business. And volume, both for engine and airframe parts, has actually been quite consistent over that period of time.

Okay, great. And then with that pretty good growth and then, obviously, the drop-off of KC-10, which was, from my understanding, much lower margins. You did call out the $1 million in nonrecurring costs but the -- on that. The gross margin line, with this great growth, is still down. Anything else in there mix-wise? Or anything that was unusual? Or any thoughts on that?

Not anything unusual.

Okay. So I mean, is that a -- the step-down in gross margin, was that due to those onetime costs? Or is that -- just a little bit of a surprise that you can grow 20% outside of a business that was probably not very profitable, but yet your gross margins year-over-year came down.

Yes. We -- it was due to those onetime costs. We had some restructuring in one of our businesses that resulted in some severance. And then we also had some customer movement in our MRO business that incurred some cost as we moved -- transitioned customers from one facility to another.

Got it. And then just last question on the purchase from Premier. Those facilities, were they -- obviously, Air Canada, you're going to -- it sounds like you're going to bring over existing work you have today plus the incremental through that facility. Are those facilities serving other customers? Is there other revenue and utilization going on there and as the transition goes to you guys?

Yes. There is existing revenue there. The 2 facilities -- one of the facilities is full of other customers in addition to Air Canada, which you mentioned that the Air Canada E-jet work is being done in the one facility already today along with other customers. We plan to work with the existing customers to transition them either to the other Premier facility or other of AAR facilities as the A320 portion of the Air Canada work spools up.

Your next question comes from the line of Ben Klieve.

All right. So a couple of questions for you. First of all, kind of building off of the discussion in the MRO facilities that you just bought. I'm wondering what, if any, impact it will be on your existing U.S.-based facilities. Are you anticipating any kind of shift in business from the U.S. towards those Canadian facilities?

Yes.

How do you see that playing out?

No. No. If anything, it could be the opposite where we take some of the work that exists there and move it to another one of our U.S.-based facilities. But nothing from the U.S. will migrate to Canada.

So this contract is not about moving and the acquisition's not about moving work or jobs outside the United States. In fact, this is purely around capturing business in the Canadian market and retaining business they currently do. But we're looking at this as a way to bolster our presence in the North American market, strengthen our position here in North America, which obviously is mostly U.S.-based.

Okay. Perfect. And then on -- with those facilities, is the workforce out there, is there any meaningful union representation?

No.

No. Neither facility is union.

And you said at neither facility?

Neither facility is union.

And I guess, last question on that is kind of the timing. David, you said that there could be some more information coming out about the -- what would be incremental growth above your existing relationship. Do you guys know roughly when you think we're going to find out more about the specifics on the revenue and kind of when the revenue is going to begin ramping?

We should be able to share that information in 1.5 weeks, so 10 days. So the end of next week, we'll have that information for you.

Your next question comes from the line of Michael Ciarmoli.

Maybe just to stay on that Premier. What was the rationale for them wanting to sell those businesses, those facilities?

Well, you had a private owner, an entrepreneur. He was getting to an age where he's looking to retire and lessen his burden, if you will. The businesses were growing. And I think the timing was right for him, and it was right for us, and it was right for Air Canada. So I think you can see there's a connection between the acquisition and the contract signing with Air Canada. And I think he was helpful in making all that happen.

Okay. Okay. Well, is this a competitive process? Was anyone else interested? Or was this more of an exclusive for just you guys?

I can't say that I -- you never know those things 100%-wise, right? I mean, we felt we had a good -- we've had a long-standing relationship with Air Canada. We -- Air Canada introduced us to these folks, and there may have been others. But I can't tell you that there were or there weren't. I don't know.

Okay. That's helpful. And then just -- I think you guys also had maybe an announcement. I think it might have been in late August. You got an exclusive deal with AMETEK to distribute some of their military-related content. Can you just elaborate on that? I think you've got a couple of these exclusive deals on the distribution side. What are you guys bringing to the table that you're sort of landing these contracts versus some of the other distributors out there? Why are some of these OEMs choosing you guys?

So thanks for the question. Growing that distribution business has been a big part of our strategy for the last few years, and we've seen a lot of success in capturing exclusive distributorships just like the AMETEK deal. I'd say the value proposition for us relative to our 2 largest competitor, Aviall and Satair, is our independence and our channels to market. So with the growth of the power-by-the-hour business, with the growth of the MRO business, we have a number of touch points with the customers that allow us to push the OEMs' product in a way that our competitors may not be.

Okay. Okay. That's fair. And then just last one. I'll ask more of a bigger picture on the market. Boeing pushing for their services, on transit the services market. They've got some pretty ambitious goals. Have you guys seen anything? I mean, is there an opportunity for you guys to partner with Boeing? Is it more of a risk maybe as it relates to all the different aspects of your aviation businesses from the distribution, the integrated services supply chain? What kind of color can you provide around what Boeing is or what you're seeing in the marketplace with Boeing?

So Boeing, of course, is a very different company than AAR. And Boeing has made some noise about looking to be in the avionics industry in a way that they haven't in the past, largely due to their interest in capturing more aftermarket activity. And I believe you've seen the UTC-Collins transaction. I believe that Boeing -- our relation with Boeing today is their supplier, their customer and their competitor. They were a competitor on the flydubai transaction. And I'm sure they will win some competitions, and they'll be a good competitor. But nevertheless, I think we offer speed, customer familiarization, a broader product line offering in that we can support not just your Boeing fleet but also your Airbus and Bombardier and Embraer fleets. And this is our core fundamental business. We understand it particularly around maintenance. We understand how to get aircraft in and out of hangers quickly and safely on the supply chain business. We understand how to value inventories in ways that might be a little tougher for somebody like Boeing. Plus, as I indicated, we go across the different platforms and aren't Boeing-centric or Airbus-centric but can really focus on the customer and their solution set. So we don't believe that the -- their interest in the aftermarket is necessarily competitive to our interest, but time will tell. We feel good about our positioning.

Got it. Last one, INL contract. Are we still on track for October 31? Or will we hear something sooner?

Well, October 31 should be the latest date. We're staying hopeful we might hear something sooner. But it should be no later -- as of today, no later than October 31.

Your next question comes from the line of [Stan Mann].

I have a question on a contract that I don't think you've mentioned. I'd like to kind of get some clarity on. The contract with the State Department, the big contract, is that going to start in this fiscal?

Yes. So Stan, the last question was around the INL contract, which is the State Department contract. It is under a -- still under a protest. The first protest, we succeeded at the GAO level. The incumbent then proceeded to sue the U.S. government on their decision at the Court of Federal Claims. The case is currently at the Court of Federal Claims and will be -- there will be a decision rendered on October 31 or sooner. So we have not begun work. We are hopeful that the decision will be in our favor as all the previous decisions have been and that we would be -- receive a notice to commence work shortly thereafter.

Okay. So that's still in the pipeline?

Yes. Yes.

Use of cash, David. Can you kind of give us your priorities or kind of priorities...

Yes. So Stan, similar to the past, I mean, we're very focused on growing the business. So we're investing in the business. We've discussed in this call a couple of contracts, the flydubai contract and the Hawaiian contract, as well as -- you filed the company over the years. Other contracts we've recently received in supporting the inventory needs of airlines around the world. And these contracts have a peer where they require investment until we get -- start seeing cash flows and return. We will start -- we will continue to look for ways, as we have with this acquisition of Premier, to enhance the company, enhance our value proposition and under the belief that we're strengthening our product offering in a way that makes us more valuable over time. So our first priority remains investing in the business, and then we'll look for ways to get capital back to our shareholders, as we've also demonstrated over the last 3 to 4 years. So we've given back through share repurchase and dividends about $250 million, and we have a recent reauthorization -- or share repurchase authorization, I should say, by the board to refresh our last authorization, which was for $250 million worth of our stock. And we will, from time to time, be returning capital in that fashion.

Okay. Your cash flow with the Premier, you're currently using your full cash flow but not liquidity?

Yes. So our liquidity is -- we have a healthy liquidity position in excess of $300 million, and we will be financing the Premier transaction with a specific piece of Canadian dollar base financing. And so our liquidity is -- remains strong. We are investing in the business on Q1. We were a net investor -- a net consumer of cash, I should say. And I would -- we would expect that through the balance of the year, we'll be a net generator of cash.

Oh, okay. Last question and probably may have no impact on you at all. But the United Tech-Rockwell Collins acquisition, how does that change your -- either your planning, your strategy, your priorities? What effect will it have on AIR, if any?

So we're very cognizant of the transaction. We do business with both United Technologies and Collins. We don't anticipate that those relationships -- we're not anticipating any change in relationship. We're a little bit tighter with UT than we would be with Collins. So if anything, hopefully, the UT management will encourage Collins to do more business with us. So as we sit here today, we view it neutral to potentially positive.

Okay. Collins was your father-in-law's first account.

Yes. It was. True.

Everything goes in circles.

There are no further questions at this time.

Okay. Well, thank you so much for your participation today. Hopefully, you're as pleased with the results as we are, and look forward to the next time we convene. Thank you.

This concludes today's conference call. You may now disconnect.