Earnings call: AAR reports robust Q1 fiscal 2024, anticipates continued demand

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Earnings call: AAR reports robust Q1 fiscal 2024, anticipates continued demand
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AAR (NYSE: AIR ) Corp reported a strong first quarter for fiscal 2024, with sales up 23% year-over-year to $559 million, driven by a 34% increase in commercial customer sales and a 3% rise in government customer sales. The Parts Supply segment saw a 40% sales increase, while Repair and Engineering sales rose by 8%. Integrated Solutions sales increased by 22%. The company expects to see continued demand for its parts and services, projecting mid to high teens year-over-year sales growth for Q2.

Key takeaways from the earnings call include:

AAR anticipates accelerating growth, particularly in its government business, as it secures new contracts and focuses on fleet readiness.

* The company expects to exceed its long-term growth target of 5-7% for Q2 and the rest of the year.

* AAR views the grounding of next-gen aircraft as a positive for its current fleet, despite potential constraints on the supply of USM material.

* The distribution business is expected to contribute to higher operating margins as it continues to grow.

* AAR maintains profitability despite higher parts prices, thanks to strong demand in the aftermarket.

* The company remains optimistic about engine shop visits and expects strong demand to continue.

* AAR is considering leveraging its Trax platform to address the issue of forged parts in the industry.

While labor rates have remained stable, the company is aware of potential pressure on labor costs in the future.

During the earnings call, the company also discussed the support received from its Maintenance, Repair, and Overhaul (MRO) customer base for pricing adjustments outside of contract renewal periods in order to maintain profitability. They expressed optimism about the robust maturity cycle of the CFM56 engines and the demand for shop visits.

There was mention of the potential for leveraging the Trax franchise to track the provenance of parts digitally, but it is currently not part of the Trax platform. The company is aware of the potential for increased labor costs and will seek relief from customers if necessary.

John Holmes, a company executive, expressed optimism about the demand for engine shop visits, despite issues with Pratt & Whitney's turbofan engines. He also discussed the potential of using digital tracking, like blockchain technology, to trace the origin of parts. Holmes stated that labor rates have been stable, but they are aware of potential pressure as airlines negotiate contracts with unions. The company would seek relief from customers if costs increase.

The company also announced two multiyear commercial agreements with Moog and an exclusive multiyear agreement with Pall Corporation. AAR's net leverage remains low at 1.18x adjusted EBITDA. The call concluded with appreciation for participants and an expectation of a Q2 earnings call in the future.

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