Good afternoon everyone and welcome to the AAR's Fiscal 2020 Second Quarter Earnings Call. We're joined today by John Holmes, President and Chief Executive Officer; and Sean Gillen, Chief Financial Officer. Before we begin, I would like to remind you that the comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as in our news release and the Risk Factors section of the company's Form 10-K for the fiscal year ended May 31st, 2019. In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. At this time, I would like to turn the call over to AAR's President and CEO, John Holmes.

Great. Thank you very much, and good afternoon, everyone. We really appreciate you all being here to join us today to discuss our second quarter FY 2020 results. In the second quarter FY 2020, sales grew by 13.7% from $493.3 million to $560.9 million. Our adjusted diluted earnings per share from continuing operations increased from $0.60 a share to $0.64 per share. We had a great quarter, and I'm really pleased with our overall results. Once again, we saw exceptionally strong performance from our trading activities as we continue to use our global network to source the highest demand material to support our long-term customer contracts. We saw strong results from our distribution activities as well, having benefited from the maturation of contracts secured over the last several quarters. We also continue to see solid growth from our government programs activities. The WASS and Landing Gear PBL contract, in particular, are performing very well operationally and are allowing us to build solid past performance as a foundation to capture more government opportunities. The second quarter was also our fourth consecutive quarter of improved performance in our MRO business. The actions taken to address the shortage of mechanics, such as enhancing our recruiting efforts, partnering with various schools, and repositioning elements of our workforce across our network have paid off and we are seeing benefits of those actions now. In addition to the strong financial performance, we also announced several new awards during the quarter. Our Airinmar subsidiary, a provider of component repair cycle management solutions, announced two new contracts. The first was with Alaska Airlines for Airvolution, which is a software platform that enables the customer to increase efficiency and reduce costs by increasing visibility into their component repair cycle. Airvolution is our first Software-as-a-Service offering, or SaaS, and I'm thrilled to have Alaska using our platform. In addition to this award, we continue to see very significant revenue growth for our other businesses through the digital channels that we have built over the last two years. Airinmar also signed a contract with JetBlue to provide component value engineering to help reduce repair costs. We're excited about these two awards as they represent new services to existing customers, which validates our integrated services model. Finally, we expanded our component repair services agreement with BAE Systems to include a wider range of components for its regional jet support programs. BAE cited our consistent cost savings and the high-quality delivered by our Amsterdam facility as the basis for this expansion. Before turning it over to Sean, I would like to provide an update on the sale of our Airlift COCO business, which is in discontinued operations. I'm pleased to share that we've completed the sale of all of our DoD contracts and are awaiting regulatory approval for one remaining foreign contract, which we expect to receive soon. Once received, the exit of our Airlift COCO business in discontinued operations will be complete.

Thanks John. Our sales in the quarter of $560.9 million were up 13.7% or $67.6 million year-over-year. This included a $69.1 million or 14.9% increase in Aviation Services revenues, driven by execution on new contract awards and strong demand in our parts supply activities. Gross profit increased 9.7% or $7.6 million to $85.9 million. Gross margin within Aviation Services remained relatively flat at 16.1% for the quarter, which was favorably impacted by improvement in MRO and offset by some mix in government services and increased costs in certain commercial PBH programs. While we did see increased costs in certain programs, some of the increase can be attributed to improving the operational turnaround time by more quickly closing repair orders. We are taking actions to address these increased costs, such as optimizing our vendor network and inventory pool, as well as in-sourcing repair work. Consolidated gross margin was 15.3% versus 15.9% in the prior year period, primarily due to Expeditionary Services. Our mobility activities had a softer quarter due to a contract award not being finalized in the period and some operational challenges, including raw material inflation and warranty issues. Our composite activities also had weaker performance due to mix, labor inefficiency, and higher freight costs. While overall performance should recover in the second half of the year, we are taking action to reduce overhead as well as evaluating opportunities to reduce fixed costs. SG&A expenses were 10.2% of sales versus 10.0% in the prior period, which was largely driven by investigation and compliance-related costs. Excluding investigation and severance costs, which totaled $3.3 million, SG&A would have been 9.6% of sales in the quarter. Our income tax expense during the quarter was $6 million, resulting in an effective tax rate of 23%. Net interest expense was $1.8 million compared to $2.4 million last year due to lower borrowings and rates. During the quarter, our cash flow provided from operating activities from continuing operations was $19.9 million, which improved $35.3 million from the prior year, excluding the impact of the accounts receivable financing program, which was relatively flat this quarter. During the quarter, we returned $6.7 million to shareholders via a dividend of $0.075 per share or $2.6 million and repurchased 100,000 shares for $4.1 million. The balance sheet remains strong with net debt at $160.1 million and net leverage at 0.9 times. Before handing the call back to John, I want to provide an update on the Department of Justice Investigation at Airlift regarding potential violations of the False Claims Act, which we disclosed in 2018 and with which we've been cooperating. We have recently entered into settlement discussions with the DoJ, we are happy to take a step towards resolving this matter. However, there is no assurance that any settlement will be achieved. We will keep you updated as these discussions progress. Thank you for your attention, and I will now turn the call back over to John.

Great. Thank you, Sean. Due to the strong performance in the first half of the year, we are updating our FY 2020 guidance and now expect sales to be between $2.15 billion and $2.225 billion. We now expect adjusted earnings per share from continuing operations to be in the range of $2.50 a share to $2.65 a share. Compared to our prior financial guidance, the midpoint of our revised sales guidance increased from $2.15 billion to $2.188 billion and the midpoint of our revised adjusted diluted earnings per share from continuing operations increased from $2.55 a share to $2.58 a share. We continue to expect SG&A expenses to be approximately 10.5% of sales and anticipate an effective tax rate of 24% in FY 2020. We will continue to reassess our guidance and modify it, if necessary, as the year progresses. As it relates to the cadence of our earnings over the balance of the year, we would expect to have modest sequential growth in the third quarter and then more significant sequential growth in the fourth quarter. In closing, our parts supply activity has continued to deliver exceptional performance. We're executing well on our government programs wins, and we're very pleased with recovery that we see in the MRO activities. We've got a strong balance sheet, a full pipeline of new business opportunities, and we look forward to a very successful second half of FY 2020. And with that, I'll turn it back over to the operator for questions.

Thank you. Our first question comes from Robert Spingarn of Credit Suisse. Your line is open.

Hi guys. Good afternoon.

Hey Rob, how are you doing?

Good, thank you. It was a strong quarter with solid cash flow. I wanted to revisit your revenue guidance midpoint of $2.188 billion, which suggests about 6.5% growth for the year, considering your 15% growth so far this year. This makes me think that the second half might be a bit conservative, possibly due to some unknown factors. You've been gaining a significant amount of work. I also wanted to discuss this regarding the two segments because no matter what happens with Expeditionary in the second half, which appears to be flat for the year, it seems you are suggesting that growth in Aviation Services may slow down a bit. You mentioned that the momentum entering Q3 might be weak, with a pickup expected in Q4. So, overall, how do you see the second half shaping up?

Yes. Well, again, we're really proud of the first half. It's been a great start to the year. And as we think about the second half, you do come up against tougher comps versus last year because that was about when we started to see some recovery in the MRO business, so that drives a bit of it. You did mention Expeditionary Services. As Sean mentioned, we are expecting a recovery in the second half, although, it will likely be below the plan that we originally developed when we presented the guidance originally. But overall, we're happy that we're in a position to have raised the guidance overall for the year, and this represents the best view of the opportunities that we see at this time.

Can you see any improvement with Expeditionary Services in the future? What is the long-term goal for that segment?

Currently, we are concentrating on enhancing the performance of the Expeditionary business. This quarter was impacted by some operational challenges, which we have addressed. Additionally, we have experienced delays in some government awards, which we anticipate will come through in the second half of the year. The timing of these awards will certainly influence our performance during that period. As we have consistently mentioned, our primary focus as a company has been on expanding and developing the Aviation Services segment, which is where we have made our investments and where we have seen growth. This focus represents the long-term direction of the company.

Yes, I was going to mention that even with the challenging comparisons, if I consider your numbers indicating no significant increase in the latter half of the year, and given the contracts you've been gradually introducing, I interpret that as a cautious approach. That's more of a comment than a question. However, my last question is about the Software-as-a-Service contracts you mentioned. This development is quite intriguing. Who are you facing competition from in this area?

That is a great question, and I appreciate our response. There's nothing like that in the market. It's the only application that provides the level of visibility into the component repair supply chain and also enables customers to share data. We need more customers to join the platform and share their data with us. In an anonymized manner, customers can now compare the prices they are paying against the community. This feature is generating significant interest. From a financial perspective, it's currently a very small contributor to our overall results, but it marks our first entry into a software program, and we are really excited to have Alaska on board.

Do you have any partners for this product? Was it developed in-house, or do you have others handling the technical aspects?

Yes, we certainly have technical partners that assist us in developing the platform, but their role is more consultative rather than a significant commercial partnership. We also have several technical partners who are helping us enhance our digital solutions. As I mentioned, we have seen a substantial increase in revenue through the digital channels we've established for our traditional businesses over the past couple of years.

Okay. Thanks very much. I'll jump out and come back later.

Thanks Rob.

Thank you. Our next question comes from Ken Herbert of Canaccord. Your line is open.

Hi, good afternoon Sean and John.

Hey Ken.

Hey, I wanted to ask about your gross margins in Aviation Services. You mentioned facing some challenges from government services contracts and also observed higher-than-expected costs in your commercial programs. Could you break that down for us? Additionally, regarding the commercial program side, it seems like this business isn't receiving as much capital as it used to. Could you discuss some of the challenges you're encountering, such as pricing or increased costs, and how we should view this business in the long run?

Sure. When we consider gross profit, the positives include the continued exceptional performance of our parts businesses and the recovery in MRO. However, as Sean noted, there are some offsetting factors. In terms of government programs, we are actually witnessing significant growth and strong performance in that area. While this segment dilutes the gross profit number, it positively impacts our operating margin. This mix will have a meaningful effect this quarter and we anticipate it will continue to influence us moving forward, given the growth of that sector. Regarding commercial programs, we've mentioned in previous quarters the competitive market challenges. Increased competition has driven pricing down, and while we continue to compete, we have established certain return requirements that we will not compromise. If we cannot meet those return criteria, we will not proceed with the deal. For existing contracts, we have encountered some cost pressures. We are actively addressing these issues, some of which are related to timing and specific situations this quarter. For some contracts, we accelerated operations to enhance performance, which resulted in pulling costs forward into this quarter. Additionally, due to accounting changes from last year, several of these contracts are now managed on a cash basis instead of over time, causing fluctuations in income in individual quarters due to these cost variations. It is important to note that we have not announced any new wins in this area recently, yet it remains a crucial part of our portfolio. Despite these challenges, we have achieved what we consider significant growth across the company, with double-digit growth for six consecutive quarters, driven by sectors beyond commercial programs.

Okay. No, that's helpful. It makes a lot of sense. It seems like a very competitive market. And as we look at the guidance increase, again, just a question again within Aviation Services and the growth there. It's fair to assume then that the parts business, trading and distribution and maybe some on the government side with those contracts is obviously driving the increase? Or is maybe better performance on the MRO, a material piece of that as well?

It's all of the above. Very strong performance out of trading, very healthy year-over-year growth there, continued strong performance from the new parts business, very nice growth out of the government programs area; those contracts have matured. And as you pointed out, the recovery in the MRO business is meaningful as well.

Okay. And if I could, just one final question. I know you've talked more recently about government services and the opportunities, and it sounds like WASS and the PBL contract are going well within Aviation Services. Can you provide any data, John, on maybe the bids you're seeing, the opportunities, maybe what might be flowing through in terms of your bid pipeline or your backlog? Or I mean, it sounds like now there's obviously a real high focus on these types of contracts from your customer base here in the United States, in particular, and I'm just wondering, maybe are you capturing more as a scenario where we should continue to see or expect strong growth? And maybe just a little bit about some of your activity underneath the two contracts you talked about moving forward for that business?

Certainly, we anticipate ongoing growth in our government services sector, supported by a robust pipeline. As we've highlighted in our previous updates, our success in winning contracts enhances our ability to secure additional wins, as we gain experience and can bid on a wider array of projects. This expansion allows us to explore various opportunities. Additionally, we have transitioned from being a subcontractor to a prime contractor over the last few years, which is advantageous for competing on larger contracts. We recently secured the C-40 contract, involving the sale of two used aircraft to the government, which exemplifies our ability to tap into the aftermarket. Initially, the solicitation was intended for new aircraft only, but we lobbied for changes that permitted the acquisition of used ones, successfully leading to our win. This achievement is significant, as we believe it will pave the way for further opportunities in both used aircraft and parts sales. At a recent DoD Maintenance Symposium, I delivered a keynote where we discussed the Department of Defense's interest in leveraging established aftermarket solutions to enhance fleet sustainability and readiness in a cost-efficient manner. Our commercial success stories resonated well with the audience, and we are optimistic about the growth potential within government services.

Great. Thank you very much. Nice quarter.

Thanks Ken.

Thank you. Our next question comes from Michael Ciarmoli of SunTrust. Your line is open.

Hey, good evening guys. Thanks for taking the questions. Nice quarter.

Thanks Mike.

John, can we revisit what Rob discussed regarding digital solutions? Do you have any competition in this area? I know Honeywell has their GoDirect trading. What sets your solution apart from theirs? It seems like there's a basic offering, but are you implementing any unique strategies to attract more customers to your solution? Could you elaborate on that?

Sure. We have several digital initiatives underway, both internal and external. Internally, we've worked extensively to better utilize the data we gather from our heavy maintenance, power-by-the-hour, and parts sales activities. This allows us to provide real-time information to our employees, helping them capture sales more efficiently. Externally, our parts store has been experiencing significant traffic with notable month-over-month increases. There’s a growing trend among our small and large customers to engage in digital transactions rather than relying on phone calls and emails, which we find very encouraging. While there are other platforms like Honeywell GoDirect, ePlane, and AeroBuy, our success stems from our core business model. We excel in what we do, and we are leveraging this expertise in the digital space. I'm very optimistic about the progress we are making.

Got it. That's helpful. And then just on the strength in the parts trading, I mean, clearly, we continue to see this robust activity in the aftermarket. It looks like shop visits, overhauls, everything on the schedule into next year, looks like that strength continues. Are you seeing any incremental upside from the grounding of the MAX? I mean, is that creating more tightness around 737 parts of availability and giving you more pricing power? Can you just maybe give a little color on how that's factoring into the performance of trading, if at all?

Yes, overall, the MAX is beneficial for us. We've indicated that it's currently neutral to slightly positive, but it will definitely have a positive impact in the long term by extending the lifespan of the current generation platforms. Regarding material availability, 737 materials are indeed very limited. However, we excel in sourcing that material at competitive prices. Recently, we finalized the acquisition of two aircraft, which is a significant accomplishment that will support our operations in the latter half of the year. Being the largest player in this space, we have the strongest global network of buyers and sourcing teams, coupled with the financial capacity to act more swiftly than our competitors, which gives us a competitive advantage. Additionally, we possess excellent contracts, especially with engine shops for long-term supply agreements. This allows us to quickly deploy capital when we identify the right material, ensuring we already have a buyer due to these contracts.

Got it. That's helpful. And then just to nitpick, maybe a little bit on the Aviation margins. I mean, I'm assuming all of this parts trading activity is margin accretive to some of the other services and revenue-generating activities in the Aviation business. The margins have been flattish, down slightly year-over-year. I think you did talk about some of the turn times and looking at cost there and in-sourcing. But how do we think about any potential operating leverage in Aviation Services? I mean, I would imagine the parts trading can't continue to stay this active. Should we think about you guys having some levers to pull to either sustain the margins or drive some upside once parts trading sort of normalizes?

Well, I would say, just on parts trading, I mean, we expect this heightened level of activity to continue for a long time. And that was well before the MAX grounding happened because of the contract that we have, the forecast we see from the shop and the bow wave of maintenance business that's expected to occur over the next couple of years. So, we feel very good about that business and the continued strength for many quarters to come. In terms of overall margin, it's a big focus of ours. We are focused on improving that number. MRO is not yet back at the level that it was two years ago. We're headed that way. Each quarter, we make a little bit of improvement, but that is still depressed from where it was a couple of years ago because our labor cost increased and we have not yet passed that entire cost on to the customer. The customers are being very supportive. They've got their own cost pressures and they're working with us, but we still have some work to do there. On top of that, we did bring in a lot of new talent, and that talent takes a while to get trained and get good at what they do and ultimately become more efficient on the floor. And as that happens, we expect to see continued margin improvement in MRO. And then as Sean mentioned on the commercial program, there are definitely some cost challenges that we've seen recently there, and we're taking a number of actions to address those. And as we work through that, we would expect to see margin improvement there, too.

Got it. Helpful. I'll jump back in the queue. Thanks guys.

Thanks Mike.

Thank you. Our next question comes from Josh Sullivan of Seaport Global. Your line is open.

Hey, good afternoon.

Hey Josh.

How do you feel about the inventory in your trading business? You talked about that bow wave maintenance coming up. Do you still feel the need to build that inventory in your network? Or is it that network that you have that you feel like you can trade on a spot basis that's giving you confidence?

We have been making continued investments in the inventory, so that investment has actually grown over the last few quarters. The turns have also improved, so we're seeing material come in and go out. But candidly, the demand is so significant that wherever we can find material, we get it, and often, we're able to move it very quickly. So, we have investment plans, et cetera, but those investment plans have to be flexible when we come across opportunities to get our hands on the right stuff.

Got it. And then just another follow-up on the SaaS strategy. How is price discovery going? Are these trials still or have you firmed up pricing and margin at this point?

I'm sorry, what was the question exactly?

On the SaaS strategy with the digital initiative, yes.

I would describe it as very early in the process. We have one launch customer and several others we are currently in discussions with. To put it in your terms, we are still figuring out pricing.

Got it. And then just one last one on the MRO market, where is utilization on MRO shop visits year-over-year at this point?

We are up year-over-year. We are sold out for the remainder of the year, and we have noticed customers adjusting their workloads largely due to scheduled changes related to the MAX. From our perspective, we are experiencing very high utilization.

And I would say our utilization last year was constrained by labor, rather than pure capacity. And so our labor position is better. So, we're at a higher utilization. But the constraint continues to be labor overall in that market.

I think that's a good point. The macro environment for labor has not improved year-over-year. It's our position within that environment. Thanks to the actions that we've taken have allowed us to make this recovery.

Thank you.

All great. Thanks, Josh.

Thank you. I'm showing no questions at this time.

Well, great, everyone. We really appreciate your time and your interest in our company and we wish everybody happy holidays.

Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may all disconnect.