Good afternoon, ladies and gentlemen. And welcome to AAR’s Fiscal 2021 First Quarter Earnings Call. We are 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 noted in the company’s news release and the Risk Factors section of the company’s Form 10-K for the fiscal year ended May 31, 2020. 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. I appreciate you joining us today to discuss our first quarter fiscal year 2021 results. Before reviewing the quarter, I would like to express my continued gratitude to AAR’s employees. The majority of our people have continued to come to work every day throughout the pandemic to ensure AAR’s uninterrupted support of its customers, and I am grateful for their dedication and commitment, and proud of our team’s ability to continue to navigate a truly unprecedented decline in commercial passenger flying. Turning to the results, our sales for the quarter decreased 26% from $542 million to $401 million and our adjusted diluted earnings per share from continuing operations decreased 70% from $0.57 per share to $0.17 per share. Our total sales to commercial customers decreased 48% from the prior year, while sales to government and defense customers increased 10%, reflecting new contract awards and significant shipments out of our Mobility business against the previously announced $125 million Cargo Pallets contract. For the quarter, sales to government and defense customers were 56% of the total. In response to the current environment, we have taken a number of actions to align our costs with the lower levels of demand. But we have also gone further to position the company for improved margins as demand recovers. Over the last three quarters, we have consolidated three facilities, a permanent reduction to our fixed and variable costs, and exited or restructured several underperforming contracts. We have also taken steps to focus on our core aviation services offering by completing the divestitures of our Airlift and Composites businesses. All of these actions have simplified our portfolio, improved efficiency in our operations and set us up to drive higher returns on capital. In addition to this progress, we continue to win new business during the quarter. We announced a three-year contract with the Royal Netherlands Air Force to repair F-16 jet fuel starters. We also announced two new contracts won by our Airinmar subsidiary, which provides component repair cycle management and aircraft warranty solutions. We were selected by both Frontier Airlines and Air Methods, the world’s largest civilian helicopter operator, to provide a full suite of warranty and value engineering services. In addition to the wins this quarter, we saw stabilization in certain of our businesses. Our order volume and trading and distribution were consistent throughout the quarter at a level above what we saw in April and May, but well below pre-COVID levels. In our MRO business as we head into the fall, we are encouraged by the loading we expect to see in our hangars. While our customers continue to operate in an uncertain environment and their maintenance schedules could change, the early indications are positive relative to our earlier expectations. We are in constant contact with our commercial customers globally and are continuing to look for ways to support them during this difficult time. In our Government business, where we saw growth during the quarter, we continue to pursue new opportunities and the pipeline remains full. With that, I will turn it over to our CFO, Sean Gillen.

Thanks, John. As John mentioned, we continue to take action to reduce our costs and exit underperforming activities in the quarter. These actions and other items resulted in predominantly non-cash pretax charges of $37.3 million. Also as previously disclosed, we received financial aid under the CARES Act in the quarter. The total amount received was $57.2 million, of which $48.5 million was a grant and $8.7 million was a low-interest pre-payable loan. In the quarter, we utilized $8 million of the CARES Act grant and $3 million of other non-U.S. government labor subsidies for a total of $11 million. This amount is included in the GAAP income statement but excluded from adjusted earnings. As of the quarter end, the unutilized portion of the grant was $40.8 million, which was recorded as a current liability. This amount will flow through the P&L as it is utilized, which we expect to be complete by mid-Q4. Turning to some additional financial detail in the quarter, SG&A expense was $45.3 million for the quarter. On an adjusted basis, SG&A was $39.7 million, down $10.5 million from the prior year quarter, which reflects the reduction of our overhead cost structure. In the quarter, adjusted SG&A as a percentage of sales was 9.9%. Net interest expense for the quarter was $1.6 million, compared to $2.1 million last year, which reflects the lower interest rate in the period. During the quarter, we generated $39.8 million of cash in our operating activities from continuing operations. This includes the $45 million grant portion of the CARES Act funding and a net use of cash of $18.6 million as we reduce the level of our accounts receivable financing program. Excluding the CARES Act and accounts receivable financing program impacts, cash flow provided by operating activities from continuing operations was $9.9 million. Additionally, as we are focused on lowering our working capital, we were able to reduce inventory by $19 million during the quarter. Also, we repaid $355 million of our revolving credit facility during the quarter. We had previously drawn the full balance as a precautionary measure. Our net debt at quarter end was $149.3 million and unrestricted cash was $107.7 million. Our balance sheet remains strong with net leverage of 1.1 times and availability under our revolver of approximately $355 million, and we have no near-term maturities. Thank you for your attention and I will now turn the call back over to John.

Great. Thank you, Sean. In light of the current macro environment, we are pleased with our Q1 performance. Our Government business continues to be healthy, our cargo end markets continue to generate demand, and our balance sheet remains strong. As discussed on the Q4 call, given the uncertainty in the market, at this stage, we are not providing guidance for the rest of the year. Having said that, looking forward more generally, although the trajectory of the recovery remains uncertain, we expect the aftermarket to recover faster than the OEM market. Within the aftermarket, we expect use serviceable material, in which AAR is the global leader, to be prioritized by operators over higher cost alternatives. We also expect to see more material become available to support this demand as aircraft are permanently retired and parted out. This, along with the maintenance deferrals occurring for both airframe and engine, should drive an increased need for services out of our Trading, Distribution, and MRO businesses as the commercial market recovers. While the timing of the recovery is unknown, we believe that the actions we have taken and are continuing to take to adjust our cost structure and reposition our portfolio, combined with the strength of our team, the airline’s need for lower-cost solutions and our balance sheet, uniquely position us to benefit from an eventual return of demand and to emerge as an even stronger and more profitable company. With that, I’d like to turn it back over to the operator for questions.

Thank you. Our first question comes from Robert Spingarn from Credit Suisse.

Hey. Good afternoon.

Hey, Rob. How are you?

Good. Thanks. Thanks, John and Sean. Couple of questions. So, you mentioned that you are encouraged and you are seeing some positives. Could you talk a little bit, John, about the volumes as they progressed in the various businesses, but primarily just commercial overall through the quarter-by-month? And should I interpret your comments, you are more bullish now at this point than you were three months ago?

Sure. Let me go over the businesses. In the parts business, including trading and distribution, we observed fairly stable order volume each month during the quarter. Maintenance, Repair, and Operations showed improvement throughout the quarter, with August performing better than June. We anticipate further growth in MRO as we move from Q1 to Q2. When I mentioned being encouraged, it came from the fact that three months ago we lacked clear visibility and had lower expectations for MRO loading heading into the second quarter, fall, and winter. So far, the feedback from our customers has exceeded our initial expectations at the start of Q1.

Is there any way to quantify the loading in MRO in terms of the percentage, utilization of your hanger capacity, let’s say, in the fiscal one versus what you are expecting in fiscal two and so on?

I would say that we certainly look at it in terms of labor hours that we produced. Q2 will be a better quarter in that regard than Q1, but still well below what we produced a year ago. Beyond that, at this point, I wouldn’t want to give any specifics. What I would say is that, as you are talking and seeing from all of the commercial airline, there continues to be quite a bit of movement out there in terms of what they expect in the way of demand, and certainly, headlines in the last few days would indicate there are things going on in Europe, etc. And questions about what could happen here in the U.S. But at this point, we have got pretty good dialog and reasonable visibility to what we expect to see in the second quarter.

And would MRO reflect the down 48% commercial volume decreases? When we think about the number of hours in fiscal quarter one, is it similar to that or is there something else?

Yeah. I would say, in MRO, yeah, I would say, it’s consistent to that in Q1.

And that that improves a bit in Q2.

Yeah.

Are airlines positioning for a return in traffic in calendar ‘21, is that what drives your Q2?

Yeah. We are seeing some positioning for holiday travel. So, that’s typically what drives the demand in the fall. And then the demand that we see throughout the winter and the spring is getting ready for summer travel. And we are seeing a lot of movement inside the airlines as much as, on the one hand, they want to conserve cash and be conservative. On the other hand, they don’t want to miss out to the extent that there is an increase in bookings and they have the ability to add more routes.

Okay. And then just lastly, you touched on this at the end before. You mentioned the significance of USM in the recovery. So just, can we get a little bit more specific about the trends that you have been seeing, have owners and operators started to make decisions about parting out? I think last time we convened here, they hadn’t gotten to that point yet.

Yeah.

And are new customers surfacing for USM, who previously preferred not to purchase used serviceable material?

I will address the second part of your question first. We are noticing that customers, particularly in Asia who previously showed little interest in aftermarket material, now seem more open to it, and we expect this trend to continue. Regarding the first part of your question, there appears to be a gap between the announced fleet reductions and the actual retirements. We haven't observed as many retirements as we anticipated at this stage and consequently, we also haven't seen as many aircraft going to part out as we expected. However, we do forecast that this will change. We are in a strong position with our balance sheet, so when we start to see aircraft that fit our criteria become available, we will be ready to make those investments once we have a clearer understanding of the market.

Okay. Thank you, John.

Thanks, Rob.

And thank you. And our next question comes from Joseph DeNardi from Stifel. Your line is now open.

Yeah. Good afternoon.

Hey, Joe. How are you?

I appreciate the hesitation in providing guidance on the commercial business. However, you pointed out the significant contribution from the defense sector, which offers good visibility. Could you share your expectations regarding revenue and gross profit for the defense segment for the year?

Yeah. At this point, we expect relatively consistent performance throughout the year. Our defense business has held up well, both on the transactional side, meaning the defense element of our distribution, and certainly, the program activity. You did see some movement this quarter. We saw really nice improvement out of mobility, as we mentioned. I would characterize that as elevated activity this quarter. We would expect to see that return to more normal levels in subsequent quarters. But overall, the government business has been fairly consistent throughout this period and we would expect that to remain the case. Having said all that, we do have, as I mentioned, a robust pipeline of bids as well as RFPs that we are responding to. So, there’s still quite a lot of activity out there in the government space. Everything is moving very slowly right now. COVID has slowed things to begin with, and we have talked a lot about the protest complications when we go after these new contracts. But COVID has definitely slowed things down in the acquisition world, in the government. So that’s slowing things, but there are wins that could convert and contribute to this fiscal year. And to the extent that we are successful in any of those, we will certainly announce it and discuss how it might improve the results further.

Okay. That’s helpful. And then, Sean, could you maybe just help in terms of maybe providing gross margins between commercial and defense? And given the size of Expeditionary, it’s kind of challenging to model that. So could you provide a little bit of visibility in terms of the gross margins between the two businesses, commercial and defense and then is the 12% gross margin sustainable at these volumes, and if volumes get better, gross margin should get better as well, is that a fair way to think about it?

Yeah. So, just on the gross margin, yeah, you did see that uptick in Expeditionary Services, the majority of which came from the mobility business. Within Aviation Services, you saw margin degradation down to 12% from 15% in the previous year. Government really was relatively flat. So a lot of that degradation came from the weakness in the commercial top line. So that will give you a bit of a picture of margin year-over-year between commercial activities and government. And I would expect that government, excluding that mobility piece, should largely be consistent for the year.

Okay. And then, John, could you maybe just talk about the Frontier award, maybe when that conversation started and just maybe more about, kind of, in general the conversations that airlines are having, have they shifted from pure survival mode to let’s try and plan for what we actually think things could look like on the other side of this? Thank you.

Certainly. I have two thoughts on that. It really depends on the customer and their current situation. For some customers, our discussions are focused on survival, while with others, we are having more progressive talks about how our solutions can assist them. This applies to both existing and newer customers, like Frontier. We previously had a varying degree of relationship with Frontier, mainly on a transactional basis. Although it's not a large contract in terms of dollars, we are pleased to have secured a multiyear agreement with them. This reflects how airlines are likely to explore various solutions, whether that involves USM or outsourcing maintenance they hadn't considered before. Airlines will need to adopt more creative strategies for managing costs during this period, and our Airinmar offering related to warranty management and repair cycle management presents a flexible solution. We're glad to see Frontier enter into this contract, and we anticipate more opportunities like this in the future.

But it’s safe to say, John, that those conversations kind of aren’t as frequent or robust as you maybe hope they will be six months from now once there is kind of a clear line of sight into what demand looks like for airlines on the other side of it?

Yeah. I would expect the conversations to become more robust as time goes on. And on that note, we have seen just in the last few weeks, there were multiple projects and multiple initiatives that we had with various customers pre-COVID. Many of those things were put on hold because of COVID, because it was just all hands on deck. We have seen certain customers expressing interest in restarting those conversations now that they have got better stability. But again, it really does vary by the customer.

Got it. Thank you.

Thank you.

And thank you. And our next question comes from Ken Herbert from Canaccord. Your line is now open.

Yeah. Hi. Good afternoon, John and Sean. Just wanted to…

Hi, Ken. How are you?

Just wanted to first ask on the MRO business, I mean, if you do see the loading, like the airlines are currently indicating. Are you fully staffed or is there any risk that you could see more demand than you can support and just where do you stand on the labor side to support the business?

That's a great question. We are currently addressing the demand by recalling many employees who were furloughed and, at some of our locations, we are hiring additional staff beyond those on furlough. During the furlough, we made a concerted effort to maintain contact with our top personnel and ensured they were treated well during the downsizing. So far, we have had reasonable success in attracting new talent. We have been very transparent about our focus on the initiatives we had in place before COVID, including partnerships with schools and training programs to create a pipeline of skilled talent. Over the past six months, we have worked hard to keep these initiatives active, as we want to ensure that when demand recovers, we have access to the best talent in the industry. We understand that some competitors are also hiring, and we aim to position AAR as the employer of choice. In summary, we are hiring both returning employees and new staff at certain sites, and overall, things are going well. However, we are mindful of what a full recovery could involve, including the possibility of individuals permanently leaving the workforce, so we need to attract new talent from schools.

Okay. That's helpful. As you consider the discussions happening now, can you provide any insights on labor rates and whether you are needing to make adjustments to reflect the financial position of the airlines, or if you can maintain rates and ideally begin to drive some increases on the MRO side?

We have generally been able to maintain our rates. While there are ongoing individual negotiations, we haven't engaged in significant discussions about increasing rates so far. Regarding our labor costs, we heavily relied on contract labor in the two years leading up to COVID, which served as a major source of labor for us. However, contract labor and flat rate teams, which are another form of contract labor, tend to be more expensive than hiring full-time employees. As we rebuild our workforce, we are focusing on hiring more full-time staff. While using contract labor can be beneficial for flexibility during fluctuating demand in our facilities, we intend to be more disciplined in the overall amount of contract labor we utilize in the hangars. The cost for a full-time employee remains unchanged, but we are actively working on managing our labor expenses by adjusting the balance between full-time and contract workers.

That’s very helpful. I have one final question regarding the part side, specifically about the potential for USM. There has been speculation that the financial positions of airlines may restrict the number of retirements as they bring capacity back and look to postpone new deliveries. I understand that credits are quite favorable at the moment. Could you explain how you are forecasting retirements and the availability of USM, particularly in terms of when we might expect to see an increase? Also, do you have any insights on how much you anticipate seeing, and is there a possibility that the figures could be lower than we are currently estimating?

When you say come in lower, do you mean the number of retirements or the level of demand?

The number of retirements, I think, demand will be pretty good, if the aftermarket continues to improve, but the availability of material?

We expect that we have several scenarios to consider, and as you know, the situation is very dynamic right now. Generally, we anticipate a net increase in the availability of aftermarket material as we move towards recovery. However, reconciling that with the heightened demand poses another challenge. Overall, we expect this to be beneficial for our aftermarket trading business.

Great. Well, thank you very much.

I would like to emphasize that we anticipate increased demand as we move into the recovery phase, particularly due to a significant amount of deferred maintenance on engines, which will result in considerable requirements.

Great. Thank you.

Thank you.

Thank you. And our next question comes from Michael Ciarmoli from Truist. Your line is now open.

Hey. Good evening, guys. Thanks for taking the questions. John, maybe just to stay on material availability, I mean how much you guys getting out there and sort of speculating in the marketplace. I know parts were extremely tight. I am just thinking about the pricing environment, and I mean, did you said, you use the term everything is pretty dynamic now. But if the MRO overall market kind of stays pretty sluggish into next year, I mean, are you comfortable going out there, sourcing all that material potentially?

Our focus right now, as we mentioned, is really on working capital and we are very pleased with the fact that we were able to reduce our inventory by $19 million during the quarter, and as we mentioned, after you adjust for the accounts receivable and the CARES money, we would be $10 million cash flow positive. So, we think in this environment that’s a great accomplishment, and generating cash is the main focus of ours going forward. We want to make sure that we do those things so that we have the balance sheet and the confidence so that when we see the right material come on the market, we have got first-mover advantage and have the capital to maneuver ahead of our competitors to pick it up at the best price.

Got it. And what about the partnership with Napier?

Yeah.

... with them, what’s the thought process there? I mean it seems…

Yeah. That’s a great point. That is a joint venture that’s still in place. There is a great deal of dry powder associated with that joint venture. We are in very regular dialog with our partners who are very aware of all the dynamics in the market right now and that also could be a source of capital to acquire aircraft that are on lease and keep them on lease for a period of time or acquire aircraft on sublease that could also ultimately be used for the trading business. But again, there are still moving… so some moving parts right now we are focused on building up our own cash position, so that we can make moves when we feel confident in the pricing.

Got it. Just shifting gears. Some of the charges, I think $0.18 tied to rotable asset impairment and customer contract. Can you give us a little more detail? Were those customer contracts underperforming bad contracts, and the same goes for the assets; were they tied to legacy aircraft? A bit more context on those charges would be helpful.

Yes, you are correct about the exited contract being an underperforming one. This aligns with some actions we've taken over the last few quarters, where we are using this opportunity to end contracts that are not performing well when it makes sense to do so. Regarding the rotable asset impairment, these assets support program activities, and with the decline in flight hours and the exit from certain programs, we reviewed our existing assets and identified those that were no longer contributing to the programs, adjusting them to their fair value. That’s the basis for the impairment charge reported this quarter.

Got it. And it may be a good segue on the programs. I mean, I don’t remember the exact number of planes you guys had under the integrated programs. But is there any other residual financial impact we should be aware of, dramatically reduced flying hours, potentially some airlines calling their fleets, potential bankruptcies? How are you guys thinking about or handicapping that risk on the integrated programs?

Yes, we are actively managing that portfolio. As Sean mentioned, over the past few quarters, we have taken steps to restructure or completely exit underperforming contracts where necessary. Many of our program customers have fleets that are still changing, and it’s unclear how they will ultimately look. We are closely collaborating with these customers to determine if it makes sense to restructure contracts to support their new fleet composition and expected flying hours. If the changes are significantly different from what we anticipated when we signed the agreement, we will choose to exit. Most of the heavy lifting in that portfolio has been completed, but we are still in discussions with some customers.

Okay. Okay. Got it. And then just the last one, I guess, with the commercial revenues declining 48%. I know you are not going to give guidance, but do you think we have sort of bottomed here on Aviation or do you think we will see a sequential decline as we go into the next quarter?

We are pleased that bookings in Q1 were higher and remained stable compared to Q4. It's challenging to determine if this is the lowest point, as it largely depends on factors like consumer confidence, supply chains, and the impact of the virus and vaccine. However, our parts businesses have shown consistent performance over the past few months, and we have discussed how maintenance has been a strong focus. Unless there is a second wave that disrupts our progress, I anticipate that we have reached the lowest point in Q4.

Okay. And that remains true even though carriers are reducing their planned capacity. It still seems like things are progressing and improving despite the messaging we are getting from airlines like Ryanair and JetBlue as they scale back their capacity.

From the order volume we are observing, particularly the loading in the hangars from our larger customers, it reflects their current outlook on the fleet. However, as we have mentioned repeatedly, this could change. We are noticing less activity in maintenance schedules than we did a quarter ago, but it remains very dynamic.

Got it. All right. Perfect. Thanks, guys.

Thank you. And our next question comes from Josh Sullivan from The Benchmark Company.

Hey. Good afternoon, John, Sean. Just on the freighter conversion market, what do you think that that cycle looks like? Is it still pretty strong, any thought? The market’s overshooting itself at some point?

I think it’s still pretty strong. I think that’s a great point that you might be getting to the stage where it could be overshooting itself, obviously, there have been some deals announced recently, where fleets of aircraft have been acquired that are going to go to freighter. But I think at this point, it’s still pretty strong. But there is a lot of interest there and that very quickly can get frothy?

Got it. And then I guess just switching over to some of the digital offerings you guys had put together before COVID hit. Has the disruption helped with adoption of those products, opened up any opportunities for you guys?

That’s a great question. We continue to see, albeit at a depressed level, traffic through our digital channels. There are a number of initiatives that we had begun pre-COVID. We paused a couple of those, but we have restarted them to bring new digital services to market and have really used this time to reflect on what we think will be successful going forward. I am encouraged by the continued interest from our customers in all sorts of digital solutions and we are fortunate to be in a position where we have got the capital to continue to make the investments. But digital and the development around it remains a core part of the strategy.

Got it. Thank you.

Thank you.

And thank you. And we have a follow-up question from Joseph DeNardi from Stifel. Your line is now open.

Yeah. Thanks. John, just along the lines of how many additional airlines could maybe use your value-oriented services on the other side of it that maybe didn’t needed before this, is there any way to quantify that, like, maybe just in the U.S.? How many airlines took advantage of that, maybe how many airlines didn’t need to because of their financial strength and that may be different six months from now? Thanks.

In the U.S., there are still several large carriers with whom we have some business, but we see significant opportunities. For instance, we have one major airline where we have successfully penetrated the account, generating over $100 million. Conversely, there's another airline with a similar fleet where we do less than $10 million. I believe there’s considerable opportunity within the U.S. market, both with the major carriers and the low-cost carriers. In Asia, we've experienced strong growth over the past few years, yet there’s still vast potential with larger Asian carriers as they consider adopting non-OEM and aftermarket solutions like ours. Recently, we've seen encouraging inquiries from our Asian customers, indicating their willingness to explore greater collaboration, which marks a shift from where we were just a year ago. Additionally, I would include the Middle East in this view, as historically, those operators have focused more on OEM solutions. While we haven't yet engaged in the same level of dialogue there as we have with some Asian customers, I am hopeful that more opportunities will arise from the Middle East for us.

That’s helpful. Thank you.

Thank you. And I am showing no further questions.

All right, everybody. We really appreciate your time and your interest. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.