AAR Corp.

Good afternoon, everyone, and welcome to AAR's fiscal 2025 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'd like to remind you that the comments made during the call may include forward-looking statements as defined in the Private Securities and 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 on Form 10-K for the fiscal year ended May 31, 2024. In providing the forward-looking statement, 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.

Great. Thank you. And thank you to everyone for joining us this afternoon to discuss our most recent quarter's results. We are very proud of the performance we delivered during our first quarter of fiscal 2025. This was a very solid start to the year, and I'm grateful to our team for continuing to deliver. A, our advanced strategic initiatives and continue to execute well across the company. We are benefiting from structural tailwinds, elevated levels of air travel, and an aging fleet which drives demand for our aftermarket services. Our company is more focused than ever within our three main operating segments, parts supply, parent engineering, and integrated solutions. We are making investments in each of these three segments to drive growth, improve our efficiency, and deliver higher margins. You saw that this quarter, and we expect the benefit from these investments to continue throughout our fiscal 2025. With that, I will turn to our first quarter results. We delivered quarterly sales of $662 million, up 20% year over year, driven by growth in each of our segments. Additionally, we had growth in both our commercial and government businesses, with each growing at 20%. Our distribution and tenure activities had particularly strong performance, and our recent acquisitions of tracks and product support were also meaningful contributors this quarter. Regarding profitability, I am pleased that once again we demonstrated significant operating margin expansion. Our adjusted operating margins increased by 180 basis points year over year, from 7.3% to 9.1%. This was the result of the continued organic margin expansion, as well as contribution from the tracks and product support acquisitions. I'm now going to go into these results in a little more detail for each of our three main segments. 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 used serviceable material, or USM. Distribution represents nearly 60% of parts supply and 22% of consolidated sales. USM represents approximately 40% of parts supply and 15% of consolidated sales. In new parts distribution, sales grew 26% organically, driven by continued market share gains. We benefited from both continued commercial demand strength and recovery in our government volumes. We're 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. This is a key driver behind our consistent market share gains, and we believe we have a long run one way ahead of us as we have a strong pipeline of opportunities. From USM activity within parts supply, we saw a decline in year-over-year sales driven entirely by the lack of whole assets, predominantly engines, available in the markets. The decrease in whole assets sales is a result of the current dynamics in the aviation aftermarket. The continued delay of new aircraft deliveries, ongoing challenges with new engine platforms, have resulted in a greater use of the existing fleet, which has resulted in lower retirements. Overall, this is good for AR. In USM specifically, it means that there is less supply available. We do anticipate more aircraft retirements over time, which will increase the supply of USM to service that demand. Turning to repair and engineering, sales growth was 58% in the quarter. Excluding the product support acquisition, sales growth was 6% as we continue to see strong underlying demand for our MRO services. Even though our hangers are largely at capacity, we continue to grow inside of our existing footprint with both increased efficiency and improved throughput. That said, our hanger capacity expansions in Miami and Oklahoma City remain on track for operation beginning in the second half of calendar 2025. As a reminder, these expansions will add approximately $60 million of annual sales. Regarding the Triumph product support acquisition, the business has exceeded our initial expectations in the first two quarters, and we are in the early stages of unlocking significant additional value. In terms of cost synergy, we are on track to achieve the previously announced target of $10 million and are confident we will exceed this number once we complete the consolidation of our existing Long Island facility into the facilities in Grand Prairie, Texas, and Wellington, Kansas. Additionally, we continue to make progress on insourcing repair work in support of our commercial programs and USM activities. Turning to integrated solutions, in the quarter we drove growth across both our commercial and government offerings, which resulted in total sales growth of 8% for this segment. TRAX had a particularly strong quarter with some significant new business wins and customer implementations. Customer interest in TRAX's offering remains strong, and we are excited about the potential to continue to win market share with new customers and expand our services with existing customers. Our government program activities and integrated solutions had a strong quarter as well. Subsequent to the quarter, we had two significant business wins in government programs. we were awarded a five-year firm fixed price IDIQ contract with the Navy to perform airframe maintenance on their P-8 fleet. This award is a continuation of existing work. We also won a new contract to support the engine maintenance for the Navy on the same P-8 aircraft fleet. These wins demonstrate the significant value proposition that AAR brings to its government customers. Overall, I'm incredibly proud of the quarter that we just delivered, and with that, I'll turn it over to Sean.

Thanks, John. Total sales in the quarter grew 20% to $662 million. Excluding the impact from the recently acquired product support business, organic sales growth for the quarter was 6%. Commercial sales increased 20% with growth in all three of our core segments. Our commercial distribution sales were a particular standout as it continued to drive sales growth on existing product lines and expanded newly won product lines as well. Government sales also increased 20% and improvement from the 15% growth we experienced in the fourth quarter. The 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 180 basis points from 7.3% to 9.1%. Adjusted EBITDA margin increased 180 basis points from 9.5% to 11.3%. We have a clear roadmap for continued margin improvements over the medium term as our mix shifts towards our higher margin segments and we realize synergies in the recently acquired product support business. We continue to roll out our airframe maintenance efficiency improvement initiatives and expect further margin improvements as capacity expansion projects come online. Net interest expense for the quarter was $18.3 million, reflecting the financing of the product support acquisition, and we expect Q2 interest expense to be approximately the same as Q1. Average diluted share count in the quarter was 35.6 million shares. For FY25, we continue to expect our effective tax rate to be approximately 28%. Adjusted diluted EPS increased from 78 cents to 85 cents, reflecting the benefit of our growth and margin expansion. The product support acquisition was accretive to earnings for the quarter, which we expect to continue through FY25. With that, I'll turn to the detailed results by segments. Part supply sales grew 5% to $250 million, driven by 26% growth in distribution and a 22% decline in USM. We once again drove double-digit growth in distribution as we continue to gain market share. Growth in the quarter was positively impacted by the expansion of both existing product lines and the ramp-up of new business wins, as well as greater purchases by both the U.S. and foreign governments. Our USM activities were down due to lack of availability of whole assets. Part supply adjusted operating margins increased by 110 basis points to 12.1% in the quarter, driven by distribution, which benefited from scale and mix. The improvement of distribution sales to government customers also contributed to the increase in margins. Repair and engineering sales increased 58% to $218 million. On an organic basis, sales increased 6%. 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 460 basis points to 11.2% 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, rollout of our paperless hanger initiatives, and the capacity expansions once they come online in FY26. Integrated solution sales increased 8% to $169 million, driven by growth in commercial power-by-the-hour activities, certain government programs, and some tracks. Integrated solutions adjusted to operating margin decreased by 40 basis points to 6.2% in the quarter, based on the mix within government programs. In expeditionary services, our government customer has decided to revert to the current generation pallets, and as a result, terminated our contract to provide next-generation pallets. We are the incumbent on the current generation pallets and will continue to support the government's demand for these products as we await a potential new RFP for the next generation pallet. We do not expect any material change in the outlook for expeditionary services due to the government's decision. However, related to the termination, in the quarter we recognize revenue of $9.5 million and a net loss of $3.2 million, which are excluded from our adjusted results. Turning to consolidated cash, cash flow used in operating activities was $19 million in the quarter as we made investments in the business, particularly in inventory to support the growth and distribution. Despite this cash use, we maintained net leverage of 3.3 times net debt to adjusted pro forma EBITDA. For the balance of the fiscal year, we expect to reduce net leverage through both growth in EBITDA as well as reduction in net debt. 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.