AAR Corp Q2 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Scott Mikus - Melius Research - Analyst : John, you mentioned the new distribution agreement with Chromalloy for the PMA parts on the CF6 engine. Chromalloy has also PMA'd some parts on the CFM56 and V2500 for FTAI. Are there any restrictions that would prevent you from distributing those PMA parts for those engines? And if so, is there some sort of deal that could be worked out with FTAI and Chromalloy to let you distribute those PMAs for the CFM56 and V2500?

Question: Scott Mikus - Melius Research - Analyst : Okay. And then another question on just the broader market and the commercial aftermarket. There's a lot of questions regarding the long-term viability of some of the low-cost carriers in the US. So just wondering if you could size your revenue exposure to some of the lower cost carriers?

Question: Scott Mikus - Melius Research - Analyst : Okay. Got it. And then one quick question for Sean. Sean, if you happen to have it, do you have the organic growth numbers for commercial and government.

Question: Kenneth Herbert - RBC Capital Markets - Analyst : John, you mentioned growth in the second quarter in your USM portfolio. Can you help quantify that? And maybe talk a little bit about sort of where you're seeing that specifically on the whole asset side. And how should we think about that into the second half of the fiscal year in terms of -- is that accelerating? Is it sort of moving sideways? How much upside can that provide into the back half?

Question: Kenneth Herbert - RBC Capital Markets - Analyst : How is pricing on some of these assets? Like, for instance, legacy engines like CFM56 and V25 for example, are you continuing to see upward pressure on pricing? Are you starting to get a sense that maybe that market's peaked? How are you talking -- what are you seeing in terms of pricing on some of the legacy engines?

Question: Kenneth Herbert - RBC Capital Markets - Analyst : Okay. Great. And last year, in fiscal '24, you saw a real sequential first half, second half uptick in margins in the Part Supply business. As we think about sort of the cadence first half, second half, I know you don't give specific guidance maybe by segment. But directionally, how do we think about margins in Parts Supply? And is there any reason we wouldn't see sort of similar strengthening into the back half in that segment margins?

Question: Michael Ciarmoli - Truist Securities - Analyst : Nice results. John, maybe just to stay on the margins, I think I heard you that the Parts Supply EBITDA margins down year-over-year. I think you called out maybe the mix for whole assets, but even down sequentially. Is there any reason for concern? Any change with underlying distribution margins there by customer either commercial or government or was everything truly just whole asset related.

Question: Michael Ciarmoli - Truist Securities - Analyst : Just -- yes, that's a great point on that topic. What do you think is driving that? I mean, obviously, Boeing and Airbus are still struggling mightily to get some.I mean, what's driving that change?

Question: Michael Ciarmoli - Truist Securities - Analyst : Got it. Got it. And maybe just last one, Sean. Can you maybe level set us on the R&E margins. So you're -- maybe by February or so, you get rid of the money-losing landing gear. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 07, 2025 / 10:00PM, AIR.N - Q2 2025 AAR Corp Earnings Call Can you calibrate us in terms of just for modeling revenue and then what that actually does to margins. And I don't know if it's material enough that it moves the needle for kind of the three- to five-year targets you put out there for margins, but presumably, it's going to help.

Question: Louie DiPalma - William Blair & Company - Analyst : Denise, congrats on joining the AAR team. My question, USM seems to have hit an inflection with your commentary about the better supply and this quarter's growth after recent declines. John, would you say that the worst is behind us in terms of USM and have we turned a corner there?

Question: Louie DiPalma - William Blair & Company - Analyst : And so along those lines, you would forecast for there to be a period of time in which both distribution and USM are both clicking at the same time, right?

Question: Louie DiPalma - William Blair & Company - Analyst : Great. And you announced the new distribution agreements with Chromalloy, as you discussed in your response to the first question and the Whippany, the TransDigm company, but how long should it take those distribution agreements to scale to a normalized rate as I think they were signed in November. So will there be contributions in like this fiscal year? Or is it more of like fiscal '26?

Question: Louie DiPalma - William Blair & Company - Analyst : Right. So Whippany was a takeaway?

Question: Louie DiPalma - William Blair & Company - Analyst : Got you. And for Sean, many different stocks in the stock market over the past month or so, they've been under pressure due to the rise in interest rates with the 10-year yield spiking. And we were wondering, what is your long-term view of net leverage and your appetite for M&A in regards to the recent increase in interest rates and the deleveraging plans.

Question: Joshua Sullivan - The Benchmark Company LLC - Analyst : Can you just expand on the commentary you made around potentially being part of the DOGE conversation or helping with any government in efficiency efforts. And I know this is probably a premature conversation, but can PMA fit into that conversation as well?

Question: Joshua Sullivan - The Benchmark Company LLC - Analyst : Great. I'll keep it to one.

Question: Kenneth Herbert - RBC Capital Markets - Analyst : Okay. Appreciate the follow-up. Just two quick questions. First, as you start to maybe do more in PMA and it sounds like it's limited initially, but how are you managing any potential sort of conflicts with some of your OEM partners? And I'm just thinking specifically Unison has obviously been a great relationship and a great product line for you. Is that something that's at all a concern? Or how are you managing that as you communicate into the marketplace? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 07, 2025 / 10:00PM, AIR.N - Q2 2025 AAR Corp Earnings Call

Question: Kenneth Herbert - RBC Capital Markets - Analyst : Okay, perfect. And maybe just for Sean. Can you give any color on the free cash flow outlook for the year? I mean, nice quarter this quarter. Typically, you have a very strong quarter in your fiscal fourth quarter. How is thinking on full-year free cash shaped up? And should the trajectory look similar this year as it has in prior years with the fourth quarter?