AAR Corp (AIR) 2021 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to AAR's Fiscal 2021 Fourth Quarter Earnings Call. We are joined today by John Holmes, President and Chief Executive Officer; and Sean Gillen, Chief Financial Officer.

Before we begin, I would 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 the company's news release and the Risk Factors section of the company's Form 10-K for the fiscal year ended May 31, 2020. In providing the 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 President and CEO, John Holmes.

Great. Thank you, and good afternoon, everyone. I appreciate you joining us today to discuss our fourth quarter and full year fiscal 2021 results.

Before I comment on the results, I would like to take a moment to reflect on the last fiscal year. The reduction of commercial passenger air travel to nearly 0 shortly before our fiscal year began and the persistently depressed levels of commercial traffic throughout the year tested our industry and our company to a degree that was previously hard to imagine.

At AAR, we have a strong set of values. One of them is to Every Day, Find a Way. That has never been more important than it has been over the last 16 months, and I am proud of the results we have delivered. I want to thank our employees for their commitment and endurance and our customers for their continuing support. And I'm pleased to be able to say that we are now emerging from this crisis an even stronger, more focused company.

Turning to our results. Sales for the year decreased 20% from $2.07 billion to $1.65 billion. And our adjusted diluted earnings per share from continuing operations decreased 39% from $2.15 per share to $1.31 per share. These results reflect the impact of COVID-19 on the demand for commercial air travel, but also our team's ability to reduce costs and increase efficiency to mitigate that impact.

As you may recall, our Q4 of last year was only partially impacted by COVID as our hangars completed work on aircraft that were already in the hangar when the pandemic began. As such, I'm particularly pleased to report that sales for the fourth quarter were up 5% from $417 million to $438 million, and I'm even more pleased to report that adjusted diluted earnings per share from continuing operations were up 81% from $0.26 per share to $0.47 per share.

Our sales to commercial customers increased 3%, and our sales to government and defense customers increased 7%. Sequentially, our total sales growth was 7% and our adjusted diluted EPS growth was 27%. The EPS growth was driven by our operating margin, which was 5.2% for the quarter on an adjusted basis, up from 3.2% last year and 5.0% in the third quarter.

We saw a strong performance in our MRO operations as airlines perform maintenance in advance of the anticipated return to summer leisure travel as well as the strong performance in our government programs contracts. Notably, we have not seen much of a recovery in our commercial parts supply businesses as operators continue to consume their existing inventory. Parts supply is one of our higher-margin activities, and the performance in the quarter did not yet reflect the recovery of that business.

Turning to cash. It was another strong quarter as we generated $23.5 million from operating activities from continuing operations. We also continue to reduce the usage of our accounts receivable financing program. Excluding the impact of that AR program, our cash flow from operating activities from continuing operations was $33.3 million.

The results for the year reflect our accomplishments in 3 key areas. First, we moved quickly at the outset of the pandemic to reduce cost and optimize our portfolio for efficiency. We did this by consolidating multiple facilities, making permanent reductions to our fixed and variable costs, exiting and restructuring several underperforming commercial programs contracts and completing the divestiture of our Composites business, which has been unprofitable in recent quarters.

Second, we continue to win important new business. In particular, we created a partnership with Fortress to supply used serviceable material on the CFM56-5B and -7B engine types. We were awarded a follow-on contract from the Navy that extended and expanded our support of its C-40 fleet. We expanded our distribution relationship with GE subsidiary, Unison. We entered into a 10-year agreement with Honeywell to be an exclusive repair provider for certain 737 MAX components. And most recently, we signed a multiyear agreement with United to provide 737 heavy maintenance in our Rockford facility.

Finally, we focused on our balance sheet and working capital management, which allowed us to generate over $100 million of cash from operating activities from continuing operations, notwithstanding the investments that we made to support new business growth. We demonstrated that we can generate cash even in a down market. And as a result, we are now well under 1x levered and exceptionally well positioned to fund our growth going forward. There are very few companies in commercial aviation that are emerging from the pandemic with a debt level that is actually lower than when they entered.

With that, I'll turn it over to our CFO, Sean Gillen, to discuss the results in more detail.

Thanks, John.

Our sales in the quarter of $437.6 million were up 5% or $21.1 million year-over-year. Sales in our Aviation Services segment were up 6.5% driven by continued strong performance in government as well as the recovery in commercial. Sales in our Expeditionary Services segment were down slightly, reflecting the divestiture of our Composites business.

Gross profit margin in the quarter was 16.4% versus 8.7% in the prior year quarter, and adjusted gross profit margin was 16.5% versus 13.6% in the prior year quarter. Aviation Services gross profit increased $32.9 million and Expeditionary Services gross profit increased $2.5 million.

Gross profit margin in our commercial activities was 13.4%. This reflects the relative strength in MRO, where we've been able to drive margin improvement through the efficiency actions we have taken. As the commercial market continues to recover, we would expect higher overall commercial gross margins.

Gross profit margin in our government activities was 19.7%, which was driven by continued strong performance as well as certain events that occurred during the quarter. The adjustments in the quarter include $2.1 million related to the closure of our Goldsboro facility, which had supported our Mobility business within Expeditionary Services. We have completed our consolidation of those operations into Mobility's Cadillac, Michigan facility, and the adjustment reflects our current estimate of sale proceeds from the building.

Looking forward, subsequent to the end of Q4, one of our commercial programs contracts was terminated. As a result, we expect to recognize impairment charges of between $5 million and $10 million in the first quarter of fiscal '22. This contract had been underperforming for us in recent quarters. And with this termination, our restructuring actions in commercial programs are largely complete.

As John described, we have taken steps over the last year to rationalize certain underperforming operations, including the divestiture of our Composites business, the closure of our Duluth heavy maintenance facility and the exit or restructuring of certain contracts. These activities, along with the terminated contract I just described, collectively contributed approximately $140 million of annualized pre-COVID sales, which will not return as commercial markets recover. However, the absence of these operations is now part of what's driving our increasing profitability.

SG&A expenses in the quarter were $48.8 million. On an adjusted basis, SG&A was $46.7 million, up only $0.2 million in the prior year quarter despite the increase in sales. As a reminder, SG&A in the prior year quarter already reflected our cost reduction actions. For fiscal year '22, we would expect a modest increase in SG&A compared to FY '21 as we invest in certain initiatives such as digital that will drive improved performance in future years. We continue to focus on driving SG&A as a percent of sales to 10% or lower as our top line recovers.

As John indicated, we generated cash flow from our operating activities from continuing operations of $23.5 million as we continue to reduce our inventory balance. In addition, we reduced our accounts receivable financing program by $9.8 million in the quarter from $48.4 million to $38.6 million. As a result, our balance sheet remains exceptionally strong with net debt of $83.4 million versus $197.3 million at the end of last year. And our net leverage as of year-end was only 0.7x.

Thank you for your attention, and I'll now turn the call back over to John.

Great. Thank you, Sean.

Looking forward, we are optimistic that the significant recent increase in U.S. domestic leisure flying is both enduring and a leading indicator of a return of business and international travel. We've seen a nice recovery in heavy maintenance and expect that performance to continue.

On that note, while we are aware of the tight labor market, we believe that the labor-related programs that we have established to recruit, train and retain skilled technicians will continue to serve us well, particularly when those programs are coupled with our ongoing investment in innovation to drive efficiency and differentiation inside of our hangars. Also, although the commercial parts supply business has lagged behind the recovery, we have recently seen some early and modest signs of a rebound in that market as well, both in our USM and new parts activities. On the government side, which has been very strong for us, we do expect a moderation in the pace of growth as buying under previous administration normalizes and some of our programs come to a natural completion such as the C-40 aircraft procurement program for the Marine Corps, but the valuable past performance that we have continued to build and the cost reduction actions that we have taken put us in a strong position to continue to take market share, and our government pipeline remains strong.

The path and pace of the commercial air travel recovery continue to remain uncertain, which is underscored by the emergence of the Delta variant. As such, we are not issuing full year guidance. However, in the immediate term, we expect to see performance in Q1 that is similar to or modestly better than Q4. As you know, Q1 is typically our slowest quarter, whereas Q4 is typically our strongest quarter, and so normally, you would see a decline from Q4 to Q1. However, this year's expectation of similar performance reflects our belief that our commercial markets will continue their recovery.

Over the medium and longer term, we are exceptionally well positioned. We are stronger today than where we were when we entered the pandemic, and we are excited to leverage our efficiency gains, optimize portfolio and strong balance sheet to continue to drive growth and margin expansion going forward.

And with that, I'll turn it over to the operator for questions.

(Operator Instructions) Your first question comes from the line of Robert Spingarn.

I wanted to see if we could expand a little on a couple of things you just talked about. First, just looking back at Q4 and perhaps talking separately about MRO and parts, how that trended throughout the quarter and then into the first quarter?

Sure. MRO was relatively stable throughout the quarter, and that continues to be the case as we go into the first quarter which, and I think we commented on this in the last earnings call, that's a bit unusual. Usually, we see a decline of activity in MRO as aircraft return to the sky for summer flying. In this case, we are seeing a more steady performance there. The parts businesses did continue to improve slightly throughout Q4, and we have seen a bit of improvement, most notably on the parts trading side just at the very beginning of the current quarter.

And John, is there anything obscure in the numbers where we're maybe seeing strengths from cargo maybe obscuring some deeper weakness in passenger?

No. No. The cargo business has been, again, relatively stable throughout the entire pandemic. I mean, we saw a bit of growth early on as we turned our attention to that market. But I'd say for the last several quarters now, it's been relatively stable.

I think what you're seeing is obviously, air travel is pacing ahead here in the U.S., and so you're seeing some of our larger customers burn through inventory that they had on the shelf as opposed to buying from suppliers. We expect that to come to an end and expect to see more activity in the used parts and new parts business in the coming quarters as they burn through that inventory. But then the rest of the world, and our parts business is our most international activity. You've got markets with one exception, China. I'll come back to that in a second. You've got markets that are just behind in terms of overall flying activity and that's certainly impacting the pace of the recovery in the parts business as well. China, on the other hand, as you know, their domestic flying has recovered largely and has been that way for several months. And we actually had a record year in the China market.

You sort of segued pretty well into what I wanted to ask you next, which is to look beyond the near term and think about the recovery with regard to the different pieces of Aviation Services, so largely overhaul and then parts. When you think about the recovery to pre-COVID levels, how do you frame it when you look at MRO and then separately at parts? What needs to happen for you to get to an Aviation Services number in the mid-500s, $500 million. You know what I'm saying.

Yes, sure. Exactly. So in the MRO business, we're being much more disciplined about the work that we take on post-pandemic than what we had before. We're really matching the volume of work that we choose to accept, if you will, with the availability of skilled labor. And pre-pandemic, we had a very heavy reliance on contract labor to produce more labor hours, but that was in a much less profitable level than what we're able to achieve today.

So based on the current footprint and labor capacity, it's possible that we'll be a bit smaller in the heavy maintenance business but a much more profitable business than we were pre-pandemic. Having said that, we continue to look at our footprint in North America and look at ways to potentially better align that footprint with labor availability than based on where we see the most supply of labor than what we have today. So that's something we're continuing to monitor.

On the parts side of the business, in the U.S. end market, we see the potential for that to actually even exceed pre-COVID levels based on early indications. And we've talked about this in prior quarters based on indications from the customer base that there would likely be an increased acceptance of used material in the aftermarket. So obviously, we need to make sure we have material to supply, but we see the potential for even greater growth out of that business over the next couple of years.

And then on the new parts business, we remain very, very bullish on that business. We've announced a number of new distribution agreements over the last couple of years. There are more in the pipeline that we plan to announce. And that business, as we add more parts, both on the government side as well as the commercial side, we definitely see that business growing beyond pandemic levels.

And finally, in commercial programs, that's a business that we've done a lot of work to restructure. It's in a much better place than it was pre-pandemic. It is smaller than it was pre-pandemic, but we still intend to be a participant in that market but just more disciplined about the contracts that we go after.

Okay. And then just to finish this up, is there a way to gauge your utilization in MRO in terms of your hangar capacity, where are you relative to the capacity that you have? That's part one of the question. Part two of the question is, we've heard anecdotally that some capacity globally has gone away during COVID, and there could be a shortage of heavy maintenance capacity. So those are the 2 questions there, your current utilization and whether there's a shortage, and does that help you from a market share perspective at some point?

Sure, sure. In terms of capacity measured as looking at our footprint, we still have a lot of capacity left. But again, we're really measuring capacity on our ability to attract full-time skilled labor. We are using contract labor a bit, but we don't want to rely on that as heavily as we did pre-COVID. So based on the labor capacity, we're pretty close to full at this point. And having said that, as I mentioned, we're looking at potential opportunities to realign our footprint with where we see available labor, which would expand our capacity down the road.

And then in terms of a shortage overall, there's definitely an elevated amount of maintenance activity out there right now. There's a lot of deferred maintenance that has not been done. And I think that's globally and you're certainly seeing that here in North America, and I think you'll see that elsewhere as aircraft come back to the sky. So I agree with the comment that there's a shortage. I think a lot of that is driven by return-to-service work, which obviously is a moment in time. But our goal is just to remain very disciplined, as I mentioned in the beginning, about the work that we take on because we want to hold on to these production efficiency gains that we've achieved in the last couple of quarters.

Your next question comes from the line of Mike Ciarmoli.

This is Pete Osterland on for Mike. First, just wanted to get a little more color on your near-term margin outlook. Are there any incremental operational efficiencies that you're still planning to implement that could help give you even more leverage? And on the other hand, are there any specific pressure points you're experiencing in terms of cost inflation as you start fiscal '22?

So we've done a lot, as we've mentioned, in terms of structural changes to improve the margin. Those are largely done. And Sean mentioned this most recent contract that was terminated that will contribute to that. So a lot to see in the medium term will come as the revenue recovers in our more profitable parts activities. So I would say the lion's share will come from that.

Over the longer term, I should say, medium to longer term, we would expect to see additional margin improvement coming from certain of our digital initiatives. We are making investments in that area. That will start to come through in the coming quarters in terms of you'll see investments that we make. But long term, that should add efficiency, particularly inside our hangar operations.

Okay. And then I just wanted to ask on your expeditionary business, just given the relatively small size of the business and the lower margins versus the company average, would you be open to consider strategic alternatives for that business?

That's not something we typically discuss publicly, but we articulated several years ago our strategy is to be a aviation services company. And as we look at the portfolio, anything that doesn't necessarily align with that strategy long term, certainly, we continue to evaluate.

Your next question comes from the line of Joseph DeNardi.

John or Sean, can you give us what commercial margins, I guess, adjusted commercial margins were in the quarter?

Yes. We don't break out the margins on an adjusted basis, but you can kind of take a look at the adjustment and kind of allocate some of that, but it's relatively close to the margin that I gave in terms of GAAP.

Okay. Okay. And then, John, just on the parts side of the business, can you talk about whether you're seeing any difference there kind of geographically? Are U.S. airlines kind of behaving differently from an inventory management standpoint? And how much longer do you foresee kind of inventories being able to be burned down before they have to come back to the market?

Yes. Definitely, outside of China, the U.S. airlines are certainly well ahead in terms of that inventory burndown. And as I mentioned, just in recent weeks, we started to see some noticeable pickup in activity in the parts businesses, both new and USM. And that's largely being driven by U.S. carriers.

We expect that you'd see the same kind of curve occur around the world as aircraft get back into service. I mentioned a couple of calls ago that we do a lot of business up in Canada. We've got 2 great facilities up there. And Canada has been largely shut down through this time. And we were very encouraged yesterday to see the announcement come out that they've got a time line to open the borders. And Air Canada, for example, subsequently followed with an announcement that they're going to be putting more flights on the network as a result. So you'll see that kind of thing, we expect, as the vaccines are deployed around the world. And those airlines will go through the same, I'm assuming the same type of curve where they'll burn through what they have on the shelf and then they'll turn to purchasing from us.

Okay. Okay. That's great. And then on Fortress, John, you mentioned, I think, that, that is starting to contribute. Could you characterize whether the contribution is at full run rate yet or how much that has left to go until it's fully up and running?

Yes. That program is going really well. Fortress is a great partner. So far, they are right on the money with the number of engines that are coming through to us. So I would say the induction of engines is right on pace. The bookings that we are starting to see now that the engines are being processed and parts are being repaired and they're being marketed to customers. So the bookings are right on pace for their expectations, but you did not see very significant shipments yet in this quarter or in Q4. You'll see a bit more in Q1, and we'd expect later this fiscal year in terms of actual shipments in the quarter, we would be at full run rate.

Okay. That's great. And then just lastly, Sean, the $140 million that you referenced, does that capture the C-40 and the commercial programs headwind? Is that what that was?

So that's just taking a look at the, call it, activities we've either exited like closing Duluth or selling the Composites business and then contracts that we've restructured or exited. The revenue that those contributed pre-COVID was $140 million. So it is not kind of a forward-looking for C-40 or anything like that, just quantifying the sales of activities that we have exited over the last several quarters.

Got it. Okay. Could you characterize what you expect from the defense business for the year if the commercial side is a little bit too hard to call? Do you have more visibility on the defense side?

Yes. We're not, obviously, defense, we got a little bit better line of sight on. But in terms of not giving guidance, I don't want to kind of go into specifics. As John mentioned, some of these contracts may be recompete and ultimately stay or end. So there's some uncertainty there and not going to quantify kind of the forward look for sales on that.

Your next question comes from the line of Ken Herbert.

John, as you look then into fiscal '22, when you think about your parts business, is there any reason you would see demand lower than aircraft utilization? And I'm guessing as utilization continues to increase, perhaps USM represents an area where you could see faster growth. But just a finer point, just to put a finer point on it, how are you viewing the pull on the parts side relative to utilization on the aircraft side as we head into fiscal '22?

I mean, I think you have pent-up demand. There's no question out there. And so we would expect to see once that inventory is burned down, thanks to elevated utilization, that our recovery would, I would say, kind of outpace utilization in the early part as you catch up, if you will, but then track with increased utilization once we hit steady state in terms of parts supply and consumption.

And do you think that catch-up is a quarter or 2 or could it be even longer?

I think what I would say is that the U.S., it's definitely going to be sooner than international because of the increase in utilization that you're seeing in the U.S. It's difficult to predict right now. I'd go back to what I said earlier. In as much as just in the last few weeks, we've seen some higher highs, if you will, in that parts activity. So we're encouraged. We're encouraged. But at this point, I wouldn't want to attempt to predict precisely when we would see that elevation.

Yes. Okay. And as we look at the MRO business, have you started to see yet the industry pull any wide-body heavy work back to the United States that previously or currently is done in Asia and China, in particular? And if we do start to see that trend, is that an interesting market to you? Will you maybe look to capture some of that and add capacity to capture some of that or how do you think about that?

So off the top of my head, I can't think of a specific example yet, but anecdotally, absolutely, there's a lot of discussion about that. We have had conversations with a couple of our customers in as much as to the extent that, that occurs, would we be able to service it. And it kind of all depends in terms of how we balance that versus other demand.

Historically, I think you know that we've been largely a narrow-body operation in North America, both in Canada and the U.S. And so that's been our primary focus. But to the extent that an existing customer wants to repatriate work, and we can make room for it and find the technical labor to support it, we'd certainly be open.

Okay. And pre-COVID, you had talked about perhaps pursuing PMA on the parts side as a growth opportunity. Is that still something you're looking at or how do you view that opportunity now?

Yes. We continue to believe that, that should be a part of our portfolio, and we continue to look at internal initiatives as well as partnership opportunities with other PMA houses out there.

Okay. Great. And just finally, on the government side, we're hearing about some pressure from the DLA. And I know you've got a number of contracts on the distribution side for military or government parts. Are you seeing any of that pressure yet on the DLA or how does that look from fiscal '21 to '22 in terms of their purchasing?

Yes. Good question, and we are. We've definitely seen a moderation in the weekly order volume out of the DLA. And we attribute that to the new administration kind of focused on spending money on the next-generation platforms as opposed to the prior administration's focus on sustainment and readiness. So we do expect moderated growth in that regard.

Having said that, even though same-store sales on military product lines may actually come into a little bit of pressure, we've got a number of new distribution agreements that we've signed or have in the queue that ultimately, we believe, would still provide growth over time in that market as we sign up new distributorships.

Okay. Great. And really nice job managing the business through the downturn.

Thank you, Ken. Really appreciate that.

Your next question comes from the line of Josh Sullivan.

Can you just kind of outline some of your Afghanistan exposure? Is it an opportunity as they pull out on some of your support services or is it more of a headwind at this point?

That's a great question. We have a couple of different operations that are involved in Afghanistan. One program is actually being restructured. The operation will change, but the kind of financial impact to AAR will be neutral to positive based on that restructuring.

The other significant operation we have over there is in support of the WASS contract. And at this point, it's unclear what, if any, impact the withdrawal will have to that operation. But your point on the opportunity is exactly correct. I mean, there will be a number of ways that, that country will be supported differently going forward, and we are focused on participating in that to the extent that we can.

And then just on the WASS contract. I mean, globally outside of Afghanistan, are there growing opportunities or is it really an Afghanistan kind of opportunity for you?

So WASS, I would say, philosophically, a Democratic administration tends to rely more on diplomacy than a Republican administration. So WASS had its best years under Obama, for example, prior to Trump. And so we believe that to the extent that the current administration looks to increase the level of diplomatic activity around the world that WASS could be a beneficiary of that. None of that has occurred yet, but certainly it's something that's on our minds.

Got it. And then just following up on the PMA question. Do you see yourselves more as a distributor of the PMA or do you think you'll be investing engineering resources and pursuing PMA of your own making?

Both.

(Operator Instructions) Your next question comes from the line of Robert Spingarn.

I'm back just with a couple of more questions. In MRO, what does smaller but more profitable look like in the future? Maybe one way to think about this is pre-COVID, we thought of it as about 1/3 of Aviation Services.

Yes. I wouldn't want to quantify that at this point. That's not something that we historically have broken out. But we tend to think of it in terms of labor hour production. And for competitive reasons, wouldn't necessarily want to get into that. But we would expect fewer hours but a higher yield on those hours this fiscal year. And then I would also point to, that's where we are today. But to the extent that we can stay true to the model of servicing the demand with full-time employees as opposed to relying on contractors and adjust our footprint so that we can continue to attract more full-time employees and go where the skilled labor is, that would allow us to expand our capacity and potentially get back to the hour production that we saw pre-COVID, but again, with much better yield. So that's how we're thinking about it.

Okay. And then all these questions are in a similar vein, looking to the future. You've announced a lot of different deals, joint ventures and relationships with customers during COVID. When we think about all of that business, how do we size that relative to, I guess, Aviation Services before? In other words, how do we think about the new business in terms of how additive it is?

Yes. I think a lot of those, and that goes back to my earlier comments around the parts businesses in particular. We believe that USM, thanks to likely increased user adoption of aftermarket material as well as programs like Fortress. And then on the new parts distribution business, the lines that we've announced over the last 1.5 years as those grow back to pre-COVID levels, we see both of those businesses that they have the opportunity and the foundation to ultimately exceed the volumes that we saw pre-COVID just on deals that we've already done. That's not counting on new business that we have in the pipeline. At this point, again, I would say it's just difficult to sketch out the pace and size of that, but we have a broader foundation to build from than we did pre-COVID for those businesses in particular.

And is there anything we should take from the Fortress or other deals about your activity on the engine side as in contrast to the airframes? We think about MRO, we think about airframe, but clearly, you're doing engine work. What's the trend there engine versus airframe in terms of parts?

Yes. So the airframe has always been the focus of or the primary focus of the MRO businesses. And don't forget, you've got landing gear components in there as well, but airframe related is the primary focus of the MRO business.

The parts business, the primary focus in the aftermarket has historically been the engines. And we expect that to continue and we see the most opportunity for us there, supplying engine parts, not overhauling engines, but supplying engine parts, in most cases, to shops that perform the overhauls. And again, as Fortress has detailed, there's a tremendous amount of cost savings opportunity for customers as they look to overhaul engines by using aftermarket engine part material as opposed to buying new from the OEMs.

Okay. And then just on distribution, these distribution deals that we've seen some investment in, in the past. What are you expecting going forward there? Any structural change to the desire to do that, more opportunity post-COVID to put your balance sheet to work?

Absolutely. We see a lot of opportunity for organic investment in that market. You recall a year ago, we announced the Unison deal. That was a meaningful investment. That's tracking right where we expected. There are other programs that we've announced since then and other things that are in the pipeline. Some of them require capital, some of them do not. But we are very excited about the position we occupy in the distribution space because unlike a couple of our larger competitors, at this point, we've got a balance sheet that we can put to work, and it's our core focus.

Right. And my last one also on investment. And maybe, Sean, you have this. What do you expect or how much do you expect to invest in digitization in fiscal '22?

Yes. I think there'll be some modest investments. Some of that will be in SG&A, as I mentioned. We'll see a bit of an increase there. And then in terms of capital, CapEx, obviously, last year was a lean year for CapEx. So you'll see some of that digital investment come through CapEx, which will be higher than this past year, a little bit more in line with historical years before that in terms of total CapEx.

Your next question comes from the line of Ken Herbert.

Sean, I just wanted to follow up on that. You generated really strong cash in fiscal '21. It sounds like CapEx heads up in '22. Can you walk through a couple of sort of the key moving pieces as we think about free cash flow in '22 and maybe if you're comfortable, how we should start to think about sort of a framework around cash conversion or where you think the business should be on a more normal basis?

Yes. I think we've made a lot of improvements in terms of the cost of the company, which shows up in our cash flow efficiency and working capital management. As you think about what occurred in FY '21 and compare it to FY '22, obviously, inventory was a significant provider of cash in the fiscal year as we focused on that and managed our position there.

I don't think you'll see the same performance in FY '21 because, as John mentioned, there'll be opportunities, both on new material as well as used material, which will show up in inventory largely to put capital to work. But we kind of haven't sketched out a specific conversion target. We'll continue to focus on managing working capital and driving free cash flow, but with a little bit more of an eye towards putting money to work on new investments.

(Operator Instructions) There are no further questions. Presenters, please go ahead.

Great. Well, thank you very much. We really appreciate the time and the interest. And we look forward to being back here to talk about our first quarter results. Thank you.

This concludes today's conference call. Thank you all for joining. You may now disconnect.