AAR Corp.

and welcome to AAR Corps Q1 2023 earnings conference call at this time all participants are in a listen only mode after the speaker presentation there will be a question and answer session to ask a question during the session you will need to press star 1 1 on your telephone you will then hear an automated message advising that your hand is raised please be advised that today's conference is being recorded I would now like to turn the conference over and to AAR management for opening remarks. Please go ahead.

Good afternoon, everyone, and welcome to AAR's fiscal 2023 first 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. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's earnings release, and the risk factor sections of the company's Form 10-K for the fiscal year ended May 31, 2022. In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-GAAP financial information will be discussed on the call today. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in the company's earnings release. 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 first quarter fiscal year 2023 results. Sales for the quarter were down 2% from $455 million in the prior year quarter to $446 million, and adjusted diluted earnings per share from continuing operations were up 17% from 52 cents per share to 61 cents per share. Our sales to commercial customers increased to 10%, and our sales to government and defense customers decreased 19%. In our commercial business, we remain encouraged by the continued recovery in air travel. As we indicated last quarter, the recovery has been strongest domestically, while Europe and Asia have lagged behind, leading to global ASMs that are still about 30% below 2019 levels. This is most relevant for our parts activities, which are our most international. Regarding our parts activities, we continue to see broadening interest in used material, but the immediate demand for used parts continues to be impacted by the utilization of green time, as well as the lack of material availability for certain high-demand assets. However, our new parts distribution activities continue to deliver meaningful growth. While contracts signed prior to COVID still have not fully recovered, The overall growth is being driven by the series of distributorships that we have signed in the last two years. We continue to take share in the new parts distribution market and expect that growth to persist. Finally, in MRO, our customers continue to signal strong demand for our services, and we expect our hangers to remain largely full for the rest of the fiscal year. In our government business, year over year, we saw the full impact of the exit from Afghanistan as well as the completion of certain other programs. Sequentially, the decline was driven by reduced activity on certain short-term programs, as well as a more normal level of part sales to the U.S. government as compared to what we saw in Q4. As our recently awarded use safety contract ramps up later this year and we win other contracts, we expect growth to resume in our government business. Turning to margins, I am pleased to report that we delivered another strong quarter. Our operating margin was 6.9% on an adjusted basis, up from 5.5% last year. We continue to demonstrate that the structural changes we made during the pandemic have resulted in sustained margin improvement. Regarding cash flow, we generated $7 million from operating activities from continuing operations. We saw opportunities this quarter to acquire high-demand assets that we expect to drive growth in our parts activities. This is an example of our ability to use our strong balance sheet to move quickly to take advantage of market opportunities. We also repurchased $22 million of stock in the quarter under our share repurchase program. Even after the share repurchase, our net leverage was 0.4 times EBITDA, and we continue to be exceptionally well positioned to fund our future growth. Turning to new wins, during the quarter, our mobility systems business was awarded a $173.5 million firm-fixed contract from the U.S. Air Force to produce next-generation all-aluminum cargo pallets. We currently produce and repair the existing generation 463L cargo pallets, and this award continues our support of the U.S. Air Force for many years to come. In addition, we were awarded a contract by the Norwegian Defense Logistics Organization to provide parts for the Royal Norwegian Air Force P-8A fleet. This program builds on our successful strategic expansion into government programs outside of the U.S. Finally, we announced the implementation of our Airvolution digital repair cycle management tool with Textron Aviation Defense. Airvolution is a customizable, fast solution for optimizing the administration of aircraft component repairs, and Textron Aviation Defense will rely on Airvolution to supplement and modernize its workflows for its repair orders. With that, I'll turn it over to our CFL, Sean Gilden. We'll discuss the detail of the results.