Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AAR Corp (AIR, Financial) delivered record full-year sales of $2.3 billion, up 17% over the prior year.
- Adjusted operating margins increased from 7.5% to 8.3% in fiscal 2024.
- Record adjusted diluted earnings per share from continuing operations of $3.33 compared to $2.86 last year.
- Strong performance in distribution and government integrated solutions activities, with sales increasing 19% year-over-year in Q4.
- Successful acquisition and integration of Triumph product support, contributing to revenue and margin improvements.
Negative Points
- USM whole asset sales declined due to constrained supply, despite strong demand.
- Repair and engineering segment's revenue was relatively flat, excluding the product support acquisition, due to hangars being nearly at capacity.
- Expeditionary services segment saw a 30% decline in sales due to depressed volumes in pallets and shelters.
- Net interest expense for the quarter was $18.7 million, reflecting the financing of the product support acquisition.
- Effective adjusted tax rate increased from 23.6% to 26.4%, with an expected rate of approximately 28% for FY25.
Q & A Highlights
Q: John, just on that last item you just said 9% margins. Is that just more seasonality driving that down sequentially? What are the puts and takes for the margins dip sequentially off the last quarter?
A: John Holmes, Chairman, President, and CEO: Yeah, that's exactly right. It's the seasonality. Even though the seasonality of the business is much less severe than it was in years past. We still do experience a bit of it as the aircraft that we're working on and component volumes are a bit less during the summer because the airlines have the aircraft flying, although it's a nice increase year-over-year, I mean, Q1 last year was 7.3%. And obviously, we're forecasting 9% this year.
Q: Just to the organic targets, I guess, I know from it's been a long day and I'm a little bit confused, but you've got the margin expansion, but the EPS CAGR is the same. Presumably you've got some higher interest expense in the short term you're going to delever. I guess I'm just -- I'm trying to reconcile here these organic targets. What's my actual starting point?
A: John Holmes, Chairman, President, and CEO: I would interpret as the whole curve has shifted up, meaning we are applying the same organic growth assumptions to a higher base that includes Triumph.
Q: Any other color you USM. I mean, I get it parts are tight. What are you seeing out there in the marketplace?
A: John Holmes, Chairman, President, and CEO: Demand remains extremely strong for all that we do from a maintenance perspective, from a component repair perspective, and of course, from a parts perspective. And you're seeing great strength out of the larger carriers like United, maybe a little bit less, but still very strong, but maybe a little bit less of some of the lower cost carriers, as you might expect. But overall, for our large customers, demand is extremely strong. USM for all of those reasons is very, very tight right now. We started last quarter really bifurcating that into part sales, individual parts sales as well as whole asset sales. Parts sales, we are -- even though everything is very tight, we are executing very well and getting our hands on the highest demand individual parts. And that drove the 38% growth that we saw in the first quarter on individual parts sales. Whole assets, mainly engines, are increasingly difficult to come by, and we've seen that market really tighten up in the last few quarters. Because those assets, those whole engines are going on wing as soon as they become available, meaning they're worth more to an operator than they are to guys like us because of the new engine issues, ETF, et cetera. Again, we expect all of that to alleviate, but it's very difficult to predict exactly when that's going to occur.
Q: John, maybe just to pick up on that last note on the 1Q commentary for 15% to 19% growth, I guess that would imply something a little below, probably around 4.5% organic relative to that 5% to 10% longer-term target. So how do we think about growth this quarter being sort of on the lower end of that next quarter, maybe being below it, what changes?
A: John Holmes, Chairman, President, and CEO: A few things. Again, you've got a bit of seasonality in this quarter, so that's driving some of it. But as we integrate Triumph's support, as we continue to see supply loosening in the USM market as we ramp up the new distribution deals that we continue to sign. All of those we expect will continue to drive on increasing organic growth.
Q: Recently, we've seen airlines talking about overcapacity, especially in the US domestic market. So I'm just wondering, are you seeing any sort of slowdown whether it be in bookings for your hangars from more US domestic focused carriers or low-cost carriers? And then are they also ordering less parts as well?
A: John Holmes, Chairman, President, and CEO: We have seen a bit of a shift. We're seeing -- continued to see exceptionally strong demand out of the larger carriers, the United, the deltas, et cetera. And those are some of our largest customers. We've seen a little bit of kind of pullback from the lower cost carriers like Southwest. But the larger carriers have been very quick to fill up any demand softness. We're seeing out of those guys. So overall, the environment remains very healthy and again, given the visibility we have in the hangars through the rest of this fiscal year, we expect to be full. From a parts perspective, it's still very strong across the board, which again, is leading to that constrained supply. If we do see softening and if you do see aircraft come out of service and go to retirement, that would be a very positive thing for us because we would get our hands on assets that we need to fill the demand.
Q: You announced the distribution expansion with auto engineering, related to that, how large is your APAC business? And do you have opportunities to add APAC distribution to many of your other OEM partners?
A: John Holmes, Chairman, President, and CEO: In terms of APAC distribution specifically, I don't have that in front of me right now, we can get to that answer, but it is a large and growing market for us. In the same vein, we also announced an expansion of our agreement with Sumitomo. They've been a great joint venture partner in Japan, and we expect continued growth in that market, in particular. Having the physical presence with the Triumph facility in Thailand is also going to help it's synergistic with the distribution business. In that a number of OEM partners that we speak to want to have repair capability in region for the parts that we're distributing. So those things go together, it's still early, of course, but we are having some encouraging dialogue about potential further Asian expansion as a result of having that Triumph facility over there now.
Q: Should the operating margin in the second half of the year be higher than the first half? And will the exit rate when taking into account some initial synergies approach, that 10% threshold?
A: Sean Gillen, Chief Financial Officer: One, the operating margin, as we move through this year, we expect will increase, which is similar to this past year as well. But this year we'll have the benefit. We'll start seeing some of the synergies as we move through the fiscal year. And our goal, as you've got the revised medium targets in terms of operating margin. But as we think about this year by the end of it getting towards that 10% is the target.
Q: The government distribution improved, should the return to growth, is
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
