AAR Corp.

Good afternoon, everyone, and welcome to AAR's fiscal 2023 fourth quarter earnings call. We're joined today by John Holmes, Chairman, President, and Chief Executive Officer, and Sean Dillon, Chief Financial Officer. 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. 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 sector sections of the company's Form 10-K for the fiscal year ended May 31, 2022, and Form 10-Q for the fiscal quarter ended February 28, 2023. In providing the four different 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 in 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 Chairman, President, and CEO, John Holtz.

Thank you. Good afternoon, everyone. I appreciate you joining us today to discuss our fourth quarter and full year fiscal 2023 results. For the full year, sales increased 9% from $1.8 billion to $2 billion. Our adjusted diluted earnings per share from continuing operations increased 20% from $2.38 per share to a record $2.86 per share, which was driven by both sales, growth, and our increase in adjusted operating margin from 6.3% to 7.5%. The strong performance reflects continued execution on our strategy to leverage our improved cost structure and capture growth in higher margin activities. For the fourth quarter, sales were up 60% year-over-year from $476 million to $553 million. Sales to commercial customers increased 31% while, as expected, sales to government customers decreased 7% due primarily to the completion of certain government programs in the prior year quarter. Adjusted operating margin was 7.8%, up from 7% in the prior year quarter, and adjusted diluting earnings per share from continuing operations were up 15%, from $0.72 per share to a record $0.83 per share. We saw further growth in our commercial parts activities demand for engine parts, which represent the majority of our USM offering. USM supply remains tight, and our team continues to work to identify opportunities to acquire material to meet the robust demand. Further, our recent new parts distribution contract awards continue to ramp up. During the quarter, we did experience some delays from OEMs due to supply chain issues, but we are working with our partners to receive the overdue material to ship against our backlog. At MRO, demand remains strong, and even though our hangars have been mostly full for some time, we were able to drive some additional volume through our footprint in the quarter. Labor availability remains tight, but our attrition levels have stabilized, and our many partnerships with schools and other sources of talent continue to serve us well. In integrated solutions, although our government work was down, we saw better performance in our commercial power-by-the-hour programs driven by increased flying internationally and the improvements that we have made to that operation over the last few years. With respect to cash, we generated cash flow from operating activities from continuing operations of $45 million. Our net leverage at quarter end was $1.07. for the TRAX acquisition. As such, our balance sheet remains strong, and we have significant flexibility to fund our continued growth. Regarding new business, we announced in March that we had agreed to acquire nine Boeing 757-200 passenger aircraft equipped with 18 Rolls-Royce RB211 engines from American Airlines. This investment provides us with feedstock to supply used serviceable material on the RB211 In addition, I want to mention the announcement that we made yesterday regarding the expansion of our Miami Airframe Maintenance Facility. Since making that announcement, we have received final approval from the Miami-Dade Board of County Commissioners for the project. Our agreement with both the Miami-Dade Aviation Department and United Airlines including expansion of an existing facility with government financial support, favorable local market dynamics, labor market dynamics, and a long-term customer commitment. We expect to break ground in our fiscal Q2, and construction will take approximately 24 months. AIR will be reimbursed by the Miami-Dade Aviation Department for the expected $50 million project cost. I would like to thank United Airlines, Miami-Dade County Mayor Daniela Levine-Cava, Miami-Dade Board of County Commissioners Chairman Oliver Gilbert, and the Miami-Dade Beacon Council for their partnership in making this important development a reality. Finally, I want to highlight that beginning with Q1 of fiscal 24, we will be separating the reporting of what is currently our aviation services segment into three separate segments, parts supply, prepared engineering, and integrated solutions. This separation better reflects the way we manage the company and how we view the areas of growth. It will also provide enhanced disclosure and insight to the investment community and other stakeholders. 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 $553.3 million were up 16.2% year-over-year. Our commercial sales were up 30.7%, driven by growth across our commercial activities. and our government sales were down 7.1% due primarily to the completion of certain government programs in our previous fiscal year. We also saw a decline in defense distribution sales due to the timing of shipments from certain OEMs. Gross profit margin in the quarter was 19.5% versus 18.9% in the prior year quarter. Gross profit margin in our commercial business was 20%, and gross profit margin in our government business was 18.5%. The strong commercial margins reflect the improved performance of our commercial integrated solutions activities that John mentioned and the contribution from TRACS, which is a higher margin offering. SG&A expenses in the quarter were $70.8 million, excluding certain TRACS expenses and other items that are detailed in the earnings press release. This figure was $64.1 million, or 11.6% of sales. This percentage is up sequentially but down year over year. In Q1, we expect a downward sequential cadence in SG&A similar to last year. Net interest expense for the quarter was $4.7 million compared to $0.6 million last year, driven by higher interest rates and borrowings. Our effective tax rate in the quarter was 23.2%, which was lower than we had anticipated due to certain state tax and other items in the quarter. We expect our effective tax rate to be approximately 25% to 26% in Q1 of FY24 and approximately 27% for the full year FY24. Cash flow from operating activities and continuing operations was $45.3 million. We ended the quarter with net debt of $203.6 million and net leverage of 1.07 times even. In light of the track acquisition and other attractive opportunities to invest in our business, we elected not to repurchase stock during Q4. We continue to have $58 million remaining on our stock repurchase program and will evaluate both usage of the remaining authorization and expansion of the program over the course of the remainder of this fiscal year based upon alternative capital deployment opportunities. On that note, we are seeing attractive opportunities for investment in the USM market and may elect to deploy capital in Q1, which we expect will drive a use of operating cash in the quarter. Regarding our resegmentation, we plan to file an 8K today that provides financial results for the new segments for FY22 on an annual basis and for FY23 on a quarterly basis. The new parts supply segment will consist of both our used serviceable material and distribution activities. The repair and engineering segment will consist of airframe MRO, component and landing gear MRO, and engineering. And the integrated solution segment will consist of our government programs and commercial power-by-the-hour component solutions and our software solutions such as Trax and Aramar. Our expeditionary services segment consisting of mobility systems will remain unchanged. In addition to the segment changes, we are changing our measure of segment performance from gross profit to operating income. We have frequently heard from investors and analysts on the desire for greater transparency, and we hope these changes will be well received. Thank you for your attention, and I will now turn the call back over to John.