AAR Corp. (AIR) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for joining AAR's earnings call for the first quarter of fiscal year 2026. With us on the line are John Holmes, our Chairman, President and Chief Executive Officer, and Sean Gillen, our Chief Financial Officer. The presentation materials accompanying today's webcast are also available in the Investor Relations area of our corporate website. Ahead of getting started, please note that remarks on this call might contain forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995; such forward-looking statements carry risks and uncertainties that may lead actual results to differ materially from those forward-looking statements. As a result, these statements do not guarantee future performance. Those risks and uncertainties are covered in the company's earnings release, along with the Risk Factors section of the company's annual report on Form 10-K for the fiscal year that ended May 31, 2025. In offering forward-looking statements, the company undertakes no obligation to provide updates reflecting future circumstances or anticipated or unanticipated events. Some non-GAAP financial information will be covered on today's call. A reconciliation of those non-GAAP measures to the most comparable GAAP measures appears in the company's earnings release and slides. A transcript of this conference call will be posted on AAR's website shortly after the webcast. At this point, I'd like to hand the call over to AAR's Chairman, President and CEO, John Holmes.

Thanks, and hello everyone, joining us for the earnings call on the first quarter of fiscal year 2026. We got off to a really solid start this year, and the results we posted make us proud as we keep pushing forward on carrying out our strategic objectives; there's supporting material on the slides that I'll point to while I walk through what's in this release. Now to Slide 3. Three main points from Q1 FY '26 stand out that I want to call attention to today. To begin, we achieved substantial growth on the top line alongside better profitability. The 17% organic adjusted sales growth we generated this quarter is something we're especially pleased about. Next, we keep winning and expanding in new parts distribution; that activity has grown faster than any other for us, averaging above 20% organic growth in each of the past 4 years. OEMs respond well to our exclusive distribution model, which is helping us keep picking up market share. And third, momentum continues for our track software solution following the big win with Delta Airlines we told you about in June. On top of that, we strengthened our software offerings further by acquiring Aerostrat, a deal we closed during the quarter. Now over to Slide 4. I'll go deeper into how we're carrying out our strategy. We're delivering on our strategic objectives — growing through capturing market share and new business, improving margin via cost efficiency and realizing synergies, boosting the intellectual property in what we offer through software and IP investments, and keeping up our disciplined portfolio management. Let's begin with share gains and new business wins from the quarter. Within our Parts Supply segment, we broadened our new parts distribution capabilities via a multiyear exclusive distribution agreement with AmSafe Bridport, a TransDigm company, making us the exclusive KC-46 and C-40 platform distributor for the global defense and military aftermarket; this win yet again shows how strong our new parts distribution capabilities are in both the commercial and government markets. Also in repair and engineering, we keep making progress on our Oklahoma City and Miami Airframe MRO expansions. Both are moving along nicely and will come online in calendar 2026, adding 15% capacity to our network. Now on to cost efficiency. We're continuing to roll out our paperless hanger solution, which boosted throughput and produced yet another quarter of sales growth from the same hanger footprint; roughly 60% of the paperless rollout is done so far. In Component Services, with the product support integration now largely finished, our focus is on driving incremental volume through wire sites, which will bring additional margin expansion. During the quarter, we also kept up consistent cost discipline, lowering SG&A year-over-year. With our software and IP-enabled offerings, we keep finding success in the market with our Trax software solutions, especially after Trax's selection by Delta validated its ability to scale and support the world's largest airlines. Not every win by Trax gets a public announcement, but for this quarter we can happily report that JetBlue — a Trax customer for a long time — moved up to e-mobility along with our cloud hosting solution. In addition, within the same quarter, we bought Aerostrat, a company providing maintenance planning software, and that purchase instantly broadens how far our software offerings can reach as well as the enterprise resource planning system capabilities of our Trax software solution. Through Aerostrat come exciting growth opportunities, with potential for deeper integration and wider scope among Trax customers who already work with us. It makes us proud that this was yet another quarter combining solid execution with fresh business wins; having said that, I'll hand things to Sean so he can walk through the results in more detail.

Appreciate that, John. Moving on to Slide 5 now. Our total adjusted sales for the quarter rose 13%, reaching $740 million compared with a year earlier. That said, if you set aside the Landing Gear divestiture — which added $19 million of sales during last year's quarter — organic sales for Q1 were up 17%, and we achieved growth across every segment, with parts supply standing out in particular. Adjusted sales to government customers climbed 21%, while adjusted organic sales to commercial customers rose 15% versus the same period a year ago. During the quarter, commercial sales accounted for 71% of the total, with government sales making up the other 29%. Against last year's same quarter, adjusted EBITDA rose 18% to $86.7 million, and adjusted EBITDA margins went up to 11.7% from 11.3%. Adjusted operating income climbed 21% to $71.6 million, as adjusted operating margins improved to 9.7% from 9.1%. Our emphasis on boosting operating efficiencies, together with strong results in our part supply segment, was a major factor behind those better margins. Sales growth combined with margin expansion produced a year-over-year rise in adjusted diluted EPS of 27%, to $1.08, up from $0.85 in last year's comparable quarter. With that, I'll move to the segment-level detail, beginning with parts supply on Slide 6. Part Supply sales rose 27% to $318 million versus the same quarter a year ago. Once again we delivered above-market growth exceeding 20% in our new parts distribution operations, with solid gains in both the commercial and government end markets. During the quarter, we also experienced a significant uptick in USM sales. First quarter part supply adjusted EBITDA came in at $43.8 million, up 34%, while adjusted EBITDA margin rose to 13.8% from 13.1% a year earlier. Adjusted operating income increased 36% to $40.9 million, and adjusted operating margin also improved, going from 12.1% to 12.9%. Now to Slide 7 for repair and engineering. Sales fell 1% to $215 million versus a year ago; however, once you exclude the effect of the land and year divestiture, organic sales growth for repair and engineering came to 8%, since demand for our MRO activities remains robust and we keep driving efficiency to raise throughput. Adjusted EBITDA of $28.1 million was 1% above the same period last year, with adjusted EBITDA margins at 13.1% versus 12.8%. First quarter adjusted operating income of $24.9 million was 2% above the comparable period a year ago, and adjusted operating margins rose to 11.6% from 11.2%. Those gains were mainly the result of continued strong efficiencies in our operations. Looking ahead, we anticipate further margin expansion in this segment, driven by realizing product support synergies, the ongoing rollout of our paperless hanger initiatives, and the capacity expansions currently underway. Now turning to Slide 8. Integrated Solutions sales were up 10% year-over-year, reaching $185 million. We recorded strong growth in our government end markets as recent new wins ramped up during the quarter. For Integrated Solutions, adjusted EBITDA came in at $14.2 million, which is 5% above what we posted in the comparable period a year ago. Adjusted operating income reached $11 million, also up 5%, while the adjusted operating margin slipped from 6.2% down to 5.9%. If you'll move with me to Slide 9 in the deck. Net debt leverage ticked up a bit during the quarter, going from 2.72x in Q4 to 2.82x. What pushed that higher were the investments we made, both organic and inorganic, over the course of the quarter. We put more than $50 million into inventory during the quarter to fuel future growth, especially within our Part Supply segment, where we identified opportunities in both new parts distribution and USM. On top of that, we spent $15 million to acquire Aerostrat, a deal that was signed and closed on August 12. Even though those investments meant we used cash during the quarter, we're expecting to be cash positive in Q2 as well as for the fiscal year; with that, I'll hand the call back to John.

Okay, thanks, Sean. If you go with me to Slide 10, there's an update regarding what we anticipate for Q2. When looking at Q2, our projection is sales growth between 7% and 10%, and that figure leaves out Landing Gear's effect, which had $20.4 million in sales during last year's Q2. We're looking for adjusted operating margin in the 6% to 10% range; across the entire fiscal year, because of how strongly we've begun, organic sales growth should come in near 10%, versus the 9% figure we mentioned in July. To wrap up, I want to emphasize how strong AAR is both as a business and as an investment; within the most appealing parts of the expanding aviation aftermarket, we hold a solid position; our distribution and repair capabilities are broad and unique, and that includes our Trax software solutions, which no one else in our industry can match. We've also kept working to optimize our portfolio so we can deliver better growth alongside higher margins. Last, through targeted acquisitions, we intend to keep enhancing what we offer in order to speed up our strategy. I want to express thanks to our worldwide employee team for their commitment and effort, and also to our customers and shareholders for the ongoing attention and backing you give AAR. Having said that, we'll hand things to the operator for questions.

Perhaps I'll start with my first question. Your full-year guidance has moved up to roughly 10%, compared with 9% growth as you exited the fourth quarter. Does that improvement come entirely from stronger part supply results? Or could you break down what's driving the slight increase in your full-year expectations?

Sure. I'd say part supply is certainly the primary driver. We posted a really robust quarter, with 27% organic growth in part supply. We remain extremely happy with how we're performing in the new parts distribution market. The customer wins we've secured there keep building momentum, and as you noted, part supply is what's fueling the brighter outlook for the year.

Could you also give us your thoughts on what's in the pipeline regarding new distribution agreements? What I'm hearing is that OEMs keep searching for potentially additional partners. Is share gain what's fueling that expansion for you? Or would you characterize it more as first-time chances, with parts reaching the market via distribution.

Right. Over the past several years, I'd say most of the wins came from us gaining share. Certainly, brand-new contracts do appear on the market. The deal we announced during the most recent quarter with AmSafe is one such instance, yet share gains account for the bulk of it. And once more, our distribution approach is distinct — an exclusive arrangement only, meaning we hold an exclusive relationship with the O&M, we don't represent a competing product, and they hold an exclusive relationship with us, so they don't engage competing distributors for a particular product or a particular market; that approach is connecting, and as we keep winning additional business, additional doors open for us; so while 2 or 3 years ago we might not have been regarded as a leading new parts distributor, these days we get invited into far more conversations, which is encouraging.

I just had a question about the revised 2026 guidance framework. You mentioned robust expansion in distribution, in both the commercial and government sides. Within distribution, do you still anticipate growing faster than the market, perhaps at a rate in the mid-teens? Or has anything shifted in either direction versus what you expect for distribution?

No. I believe you've captured it. That outlook for distribution is something we'd hold to, and we'd anticipate continuing to expand at a pace above the market there.

Then perhaps you could share some thoughts on the potential for cross-selling within repair and engineering, particularly for component services. Is there a way to characterize the success you've achieved so far when it comes to cross-selling opportunities; and also, is there a way to characterize how many more are still ahead?

Yes. Excellent question. Once again, a significant element of our approach involves capitalizing on our leading position in the heavy maintenance sector and employing that to push volume toward our component repair shops, which we obtained through the Product Support acquisition. I'd characterize us as being at an early stage of that approach. During the past year, our attention has largely centered on integration and on closing down our facility — our large facility located in Long Island — and moving that volume into the 2 sites, one in Dallas and one in Wellington, Kansas. That effort has now been finished. We're continuing to build up efficiency at the 2 sites receiving the work. However, attention has now moved toward carrying out that cross-selling approach; so we have an extensive pipeline of opportunities. I was with a major carrier just yesterday, personally making a pitch for — as part of that approach. And so far, the — we're having plenty of encouraging discussions, but the outcomes will become more significant down the road. So a substantial pipeline. And as I mentioned, we're at an early stage. The one additional point I'd make about that is the parts business, which has a far shorter sales cycle. Naturally, it's extremely transactional. You can sell parts very rapidly. With the component repair business, these involve longer-term agreements, and it requires time to get customers to shift the volume they've been sending to other providers and redirect it toward us. But because of the confidence and relationships we've built with our large airline customers, especially concerning heavy maintenance, we're confident we can capture that volume eventually.

John, Sean, good results. I'd like to return to the USM sales topic. During the opening remarks, you referenced a significant increase, so I'm wondering whether that pattern has carried over into this quarter. Also, with the fleet expected next year to take in roughly 1,500 narrow-body aircraft via new deliveries plus the GTF grounded aircraft returning to service, is visibility into whole assets reaching the market getting better?