AAR Corp.

Good afternoon, everyone, and welcome to AAR's fiscal 2024 fourth 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 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 section of the company's annual report informs 10K for the fiscal year ended May 31, 2024, which we expect to be on file with the SEC shortly. 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. 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 thank you to everyone for joining us this afternoon. We are very proud of the record performance we delivered during our FY24, and I want to thank our team for their tireless efforts. AAR advanced strategic initiatives, sharpened focus, completed our largest-ever acquisition, and we executed well across the company. We are benefiting from structural tailwinds from high levels of air travel and an aging fleet, which drives demand for our aftermarket services. Our company is more focused than ever before within our three main segments, parts supply, repair and engineering, and integrated solutions. We are making investments in each of these three segments to drive growth, improve our efficiency, and deliver higher margins. We saw the benefits from these investments in our FY24 and expect them to continue in our FY25. With that, I will turn to the FY24 results more specifically. We delivered record four-year sales of $2.3 billion, up 17% over the prior year. Our adjusted operating margins increased from 7.5% to 8.3% in fiscal 2024, which only reflects one quarter of ownership of the higher-margin Triumph product support business. And we generated record adjusted diluting per share from continuing operations of $3.33 compared to $2.86 last year. Our fourth quarter was a record ending to a record year. Sales increased 19% year over year, driven by the impact of the product support acquisition and strong performance in our distribution and government integrated solutions activities. Adjusted operating margin improved by 150 basis points year-over-year from 7.8% to 9.3% due to the contribution from product support and our solid execution in both parts supply and airframe maintenance. Given some of the changes that we have made to the portfolio, I am now going to go into the results in a little more detail for each of our three segments. Parts supply. Parts supply is our largest and most profitable segment and where we have very significant opportunity for organic growth. This segment contains two activities, new parts distribution and new serviceable material or USM. Distribution represents about 55% of parts supply sales. Distribution executed extremely well in the fourth quarter, posting the 10th straight quarter of double-digit organic growth. Revenue grew 16% driven by additional government volumes, market share gains, and continued commercial demand strength. We are the largest independent distributor of OEM parts, and our independent status is a key strategic advantage which eliminates conflicts and allows our OEM partners to serve all aircraft types. We have deep relationships with a few key OEMs, and these are all on an exclusive basis. We continue to sign new exclusive agreements, And we had several meaningful wins in the quarter, including our multi-year contract extension and expansion with Sumitomo Precision Products to distribute its B2500 starter and valve components, our new multi-year agreement with Triumph to support its actuation product line, and the expansion of our agreement with Auto Engineering to distribute electromechanical components. We are optimistic about continuing to gain market share and add new distribution lines at a similar pace going forward, particularly as we move into electronic components and the business and general aviation end market. USM. USM represents about 45% of total parts supply sales. It has also performed well in the quarter, with sales up 1% year over year and up 7% sequentially despite extremely tight supply conditions. As a reminder, in this business, we acquire used aircraft and engines, design a disassembly and repair plan, have individual parts refurbished, and then sell them to our customers at significant savings versus the new alternative. We also acquire and resell whole aircraft and engines, which is an important activity and can create lumpiness in our results. Excluding these whole asset sales, USM sales parts growth was 38% in the quarter. This underlying growth in recurring use parts reflects our strong market position underpinned by deep supply relationships to source parts, significant expertise to evaluate assets, and a world-class global sales force. We continue to benefit from the increasing adoption of USM as airlines and MROs unlock the benefits of buying used, and we believe this will continue to be a tailwind to our business for years to come. Whole assets, such as engines in particular, are in high demand due to the issues with the GTF and other new engine variants. This, coupled with relatively few aircraft retirements, is driving constrained whole asset availability. However, we expect supply pressures to alleviate over the next few years based on the recovery of new aircraft production and improved new engine variant performance. This will lead to more aircraft and engine retirements, which will drive greater availability of individual parts and whole assets and allow us to continue our overall growth in USM. Repair and engineering. Turning to repair and engineering, this segment consists of airframe heavy maintenance and component repair, including Triumph product support, as well as our PMA parts initiatives. Revenue growth was 51% in the quarter. Excluding the product support acquisition, revenue was relatively flat as our hangers are nearly at capacity. That said, our hanger capacity expansions in Miami and Oklahoma City remain on track for operation beginning in the second half of calendar 2025. These expansions will add approximately $60 million of annual sales. At the beginning of the fourth quarter on March 1st, we closed on the acquisition of Triumph product support, which brings increased scale and differentiated repair capability. The acquisition exceeded our expectations in Q4, and we are in the early stages of unlocking significant additional value. In terms of cost synergy, we are beginning to consolidate our existing Long Island facility, and the product supports Grand Prairie, Texas, and Wellington, Kansas facilities. We are on track to achieve the previously announced associated cost synergy target of $10 million by Q1 FY26. The business also brings capability in-house that we can now use for repair work to support our commercial programs and USM refurbishment activities. In addition, we are leveraging our talented commercial aftermarket sales force and our government business development resources to further accelerate product support's growth. We also continue to make progress on our PMA initiative. We received FAA approval for several parts and have a significant additional pipeline that we are actively working to develop. We are in the process of integrating this initiative with the existing PMA business that came with the product support acquisition and remain committed to growing this combined PMA effort into a meaningful business over the next several years. Integrated solutions. Turning to integrated solutions, in this segment we support government and commercial aircraft operators with the management of logistics and supply chains, as well as the track software offering. The majority of what we do in this segment is supporting government customers. Our program is a long-term with an average tenure of five years, meaning this is an annuity business. In general, we are managing the aftermarket needs of aircraft operators across parts, maintenance, sourcing, and logistics in a programmatic fashion. Revenue in this segment was up 10% from a year ago, and we saw greater volumes in our State Department and F-16 programs. As you know, we acquired the TRAX software business a year ago, and the integration has gone well. TRAX is a best-in-class maintenance ERP offering, which supports nearly 150 airlines and MRO customers globally. We are growing the core TRAX business by introducing it to customers that may not have been able to reach previously and laying the groundwork for TRAX to be a new sales channel for our core parts and services offering. TRAX is a high-margin business and a long runway for growth. That concludes the update for our three core segments. Our fourth segment, Expeditionary Services, is non-core for AARP. Sales in this segment were down 30% due to continued depressed volumes in both pallets and shelters as the government prioritized spending on products that are supporting Ukraine forces. However, we now have visibility on funding going forward, and we expect volumes to normalize during FY25. Overall, I am incredibly proud of the quarter and the year that we delivered, and with that, I'll turn it over to Sean.

Thanks, John. Total sales in the quarter grew 19% to $657 million. Excluding the impact from the recently acquired product support business, organic revenue growth for the quarter was 5.5%. Our consolidated sales to commercial customers increased 20% or 4% on an organic basis, with growth in all three of our core segments. Our commercial distribution sales were a particular standout as we continued to drive sales growth on existing product lines and expanded newly won product lines as well. Our government sales increased 15% or 10% on an organic basis, an improvement from a 7% decline in the prior quarter. The organic sales increase was driven by an ongoing recovery across our government program activities and increased order volume for our new parts distribution activities. Adjusted operating profit margin improved 150 basis points from 7.8% to 9.3%. On an organic basis, adjusted operating margins also increased by 60 basis points, driven by part supply and airframe maintenance. Adjusted EBITDA margin increased 200 basis points from 9.6% to 11.6%. We have a clear roadmap for continued margin improvements over the medium term as our mix shifts towards our higher margin segments. We realize the product supports synergies. We continue to roll out our airframe maintenance efficiency improvement initiatives and the new airframe maintenance capacity expansion projects come online. Net interest expense for the quarter was $18.7 million, reflecting the financing of the product support acquisition, and we expect Q1 interest expense to be approximately the same as Q4. Average diluted share count in the quarter was 35.4 million shares. Our effective adjusted tax rate increased from 23.6% to 26.4%. And for FY25, we expect our effective adjusted tax rate to be approximately 28%. Adjusted diluted EPS increased from 83 cents to a record 88 cents, reflecting the benefit of our growth and margin expansion. The product support acquisition was slightly dilutive to the quarter, but we expect it to be accretive to earnings in FY25. With that, I'll turn to the detailed results by segment. Part supply sales grew 9% to $260 million, driven by 16% growth in distribution and 1% growth in USM. The growth in distribution was consistent with the double-digit growth we've experienced over the last several quarters as we continue to gain market share. Growth in the quarter was positively impacted by the continued ramp-up of our ARCWIN and AeroControlX lines, as well as greater purchases by both the US and foreign governments. Our USM activities had a strong quarter as sales of USM parts were up significantly. However, this growth was largely offset by a decline in USM whole asset sales as supply remains constrained for these types of larger transactions. Part supply adjusted operating margins increased by 130 basis points to 13.5% in the quarter, driven by distribution, which benefited from scale and mix. The improvement in distribution sales to government customers also contributed to the increase in margins. Repair and engineering sales increased 51% to $216 million. On an organic basis, sales were flat as growth in the hangars was offset by the roll-off of certain landing gear repair work. The product support integration is progressing well, and its acquisition contributed $73 million to revenue in the fourth quarter. Demand remains strong for our heavy maintenance and component repair capabilities, and we look to continue to drive growth in these activities. Repair and engineering adjusted operating margins increased by 490 basis points to 11.5% in the quarter, driven by the inorganic impact of product support and continued efficiency gains in the hangars. Going forward, we expect to drive further margin expansion in this segment from the realization of product support synergies roll out of our paperless hanger initiative, and the capacity expansions once they come online in FY26. Integrated solution sales increased 10% to $163 million driven by growth in our State Department program, F-16 program, and from TRACS. Integrated solutions adjusted operating margin decreased by 120 basis points to 5.6% in the quarter based on the mix within government programs. Turning to consolidated cash, Cash flow provided by operating activities from continuing operations was $25 million in the quarter as we reduced non-product support inventory by $7 million. This cash flow generation and the EBITDA growth allowed us to de-lever from 3.6 times net debt to adjusted pro forma EBITDA at the closing of the product support acquisition to 3.3 times at the end of Q4. We are pleased with this reduction in leverage and will continue to balance opportunities to invest in the business and continue debt reduction. Our balance sheet and capital structure afford us sufficient flexibility to manage our business and make decisions that maximize shareholder value. With that, I will turn the call back over to John.