AAR Corp. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Performance: Record full-year results of $2.8 billion, up 20% y-o-y. 14% organic sales growth in the quarter (excluding Landing Gear). Adjusted EBITDA margin 11.8%, adjusted diluted EPS $3.91.
• Portfolio Optimization: Substantially completed Product Support acquisition integration, divested Landing Gear overhaul business (generated $48 million cash, margin accretive).
• Parts Distribution: New parts distribution activities grew 25% organically, above market, expected to continue.
• Trax Software: Captured new business wins, including largest win with Delta Airlines for modernizing maintenance systems.
• Leverage Reduction: Ended quarter with net leverage 2.7x, on track to meet 2.0-2.5x target absent M&A.

Segment Performance

• Parts Supply: Sales grew 17% to $306 million. Adjusted EBITDA was $52.1 million, 36% higher, with margin increasing to 17.1%. Organic sales growth in new parts distribution was over 20%.
• Repair & Engineering: Sales increased 3% to $223 million. Adjusted EBITDA was $26.7 million, 6% lower, margin decreased to 12% due to closure of New York facility. However, expect margin expansion from Product Support synergies and hangar expansions.
• Integrated Solutions: Adjusted sales increased 10% to $181.5 million. Adjusted EBITDA was $14.2 million, 13% higher, margin increased to 5.9%.

Guidance

• Expect organic sales growth to approach 9% as in fiscal 2025.
• Q1 sales growth expected 6%-11% (excluding Landing Gear sales).
• Adjusted operating margin expected 9.6%-10% in Q1.
• Aim to delever to 2.0-2.5x net leverage in fiscal 2026 absent M&A.

Risks

• USM environment can cause transaction variability affecting revenue growth.
• Closure of New York facility caused temporary margin impacts in Repair & Engineering.
• Macro environment headwinds in Integrated Solutions from Department of State cost reduction efforts.

Question and Answer

Q: Ken Herbert asked about Q1 revenue growth range.

A: John Holmes said it's due to USM transactions, with larger transactions potentially moving, anticipating growth but range due to USM environment.

Q: Louie DiPalma asked about Trax's revenue potential.

A: John Holmes said Trax doubled revenue to $50M, Delta deal is multiyear, goal to double Trax revenue with new wins and existing user upgrades.

Q: Scott Mikus asked about Parts Supply margins.

A: John Holmes said whole asset transactions are part of USM, margin varies but Parts Supply is low teens with potential for mid-to-high teens.

Q: Sam Struhsaker asked about KIRA JV.

A: John Holmes said KIRA JV allows teaming to bid on contracts AAR couldn't alone, modest growth vector.