AAR Corp.

Good afternoon, everyone, and welcome to AAR's fiscal 2024 first quarter earnings call. We're joined today by John Holmes, Chairman, 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 that differ materially from 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 section of the company's annual report on Form 10-K for the fiscal year ended May 31, 2023. In providing the fourth 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 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. A replay of this conference call will be available for on-demand listening shortly after the completion of the call on AAR's website. At this time, I would like to turn the call over to AAR's chairman, president, and CEO, John Holmes.

Thank you, and good afternoon, everyone. I appreciate you joining us today to discuss our first quarter fiscal year 2024 results. This was a very strong start to the year, and I am both encouraged by our sustained momentum and proud of our team for continuing to deliver. Specifically, sales for the quarter were up 23% year-over-year from $446 million to $550 million. Sales to commercial customers increased 34%, and sales to government customers increased 3%. Within parts supply, sales were up 40% over the prior year quarter as we monetized USM investments that we made over the last year and as recent distribution wins continue to mature. Regarding USM, even though supply remains tight, Our global sourcing team continues to secure high-demand material. New parts distribution saw continued growth in our commercial product line, which more than offsets slower parts sales to the U.S. government. In repair and engineering, sales were up 8% over the prior year quarter, driven by continued strength in our hangars, partially offset by a slowdown in our landing gear operation due to the repair cycle timing of certain gear types. In integrated solutions, sales were up 22% over the prior year quarter due to increased flight hours in our Power by the Hour programs, the contribution from TRAC, and the strength in our government programs. Notably, our F-16 program in Europe is still in the process of ramping up and will become a more meaningful contributor as the year progresses. Turning to profitability, our adjusted operating margin was 7.3%, up from 6.9% in the prior year quarter. Adjusted operating margins expanded in all of our segments except expeditionary, and this represents our 10th consecutive quarter of year-over-year adjusted operating margin expansion. Our adjusted diluted earnings per share from continuing operations were up 28% from 61 cents per share to our first quarter record of 78 cents per share. With respect to cash, as we indicated in last quarter's call, we saw attractive opportunities to invest in our parts supply segment in the quarter, which drove a use of cash in operating activities from continuing operations of 18.5 million. Specifically, we made a net inventory investment of $38 million in our parts supply segment to support both USM demand and our recent distribution wins. It is worth noting that our prior parts supply investments are what drove the growth and profitability in this quarter, and we expect strong results from these most recent investments over time as well. Even after these growth investments, our net leverage at quarter end was only 1.18 times adjusted EBITDA, and as such, our balance sheet remains exceptionally strong. Before I discuss new business, I would like to comment on the recent news regarding a parts supplier that allegedly provided uncertified parts using forged paperwork for use in CFM engine repairs. AAR needed a purchase or sold any parts from this supplier. Since our founding nearly 70 years ago, we have been exceptionally focused on quality and safety and conduct the highest level of diligence when we source parts. This incident highlights the value of our quality system, and we believe that will result in customers placing even greater emphasis on AAR's reputation for doing it right. Now turning to new business, during the quarter we announced two multi-year commercial agreements with Moog, one for distribution, and one for reciprocal component repair services. Importantly, these agreements are first steps in a new strategic relationship with Moog that we expect will lead to new opportunities. In addition, subsequent to the quarter, we announced an exclusive multi-year agreement with Paul Corporation, a Danifer company, to distribute highly engineered filtration products to foreign military customers. This agreement recognizes the extended customer reach that AAR provides to our partners as well as the investments that we have made in recent years to augment our foreign military sales capability and our compliance programs. With that, I'll turn it over to our CFO, Sean Gillins, to discuss the results in more detail.

Thanks, John. Our sales in the corridor are $549.7 million. We're up 23.2% year-over-year. Our commercial sales were up 33.7%, driven by growth across our commercial activities, particularly parts supply. And our government sales were up 2.9% to primarily to integrated solutions, partially offset by declines for new parts distribution and parts supply and expeditionary. Close profit margin in the quarter is 18.4%, consistent with the prior year quarter on a reported basis, and up from 18.1% in the prior year quarter on an adjusted basis. Close profit margin in our commercial business was 19.3%, and gross profit margin in our government business was 16.3%. SG&A expenses in the quarter were $74.7 million, which included the $11.2 million charge we announced last week associated with the Russian court judgment, and $2.8 million from TRAX acquisition and amortization expenses, as well as increased investments in the business. In the Russian judgment, a court directed us to make a payment equal to the alleged fair value of aircraft engines we purchased from a Russian airline in 2016 and 2017. We strongly disagree with the Russian court judgment, And as noted in our September 22nd 8K, believe the judgment is the result of, among other things, a hostile business and legal environment for foreign companies in Russia. Additionally, we believe we have strong defenses to any attempts that may be made to recognize and enforce the adverse judgment. Excluding discharge, the tracks expenses, and 1.1 million of compliance costs, SG&A was 59.6 million or 10.8% of sales. As we announced last month, we entered into an agreement during the quarter to effectively transfer our pension obligations and assets to an insurance company. This transaction allowed us to fully secure the funding for plan participants and eliminate our plan management activities and associated funding risk going forward. Due to the plan's funding status, no additional contributions were required as part of the transfer. And in fact, there was a surplus funding of 7.6 million, which we expect to use to fund certain 401 contributions. In conjunction with this transaction, we recognized a non-cash pre-tax pension settlement charge of $27 million in the quarter. We are very proud to be able to deliver on the commitments made to plan participants and have concluded our activities associated with a US pension plan. Net interest expense for the quarter was $5.4 million compared to $1 million last year driven by higher interest rates and borrowings. Regarding our effective tax rate, we expect it to be approximately 27% for the balance of the year. Cash flow used in operating activities from continuing operations was 18.5 million. As John indicated, this usage was driven by net inventory investment of 37.9 million in our part supply segment to support both USM and new parts distribution demand. Specifically, these investments included a variety of engine platforms for USM material and inventory to support certain recently awarded distribution lines. We expect these investments to continue to generate a strong return on invested capital going forward. Even after the investments, our net leverage remains low at 1.18 times adjusted EBITDA. We are continuing to see both robust demand for aftermarket parts and attractive opportunities for further investments in parts supply. That said, we expect to generate slightly positive cash flow from operating activities in the second quarter. Thank you for your attention, and I'll turn the call back over to John.