Samuel Struhsaker

Samuel Struhsaker (Truist Securities) asked about AAR's recent investments in inventory to support strong demand in parts supply and inquired about the company's satisfaction with current inventory levels and future inventory strategy as growth continues.

Answer

Chairman, President, and CEO John Holmes acknowledged the significant investment quarter, driven by opportunities across parts supply (VOC, distribution, and USM). He stated that AAR is encouraged by the opportunity to invest in the business for rapid growth but emphasized the need to balance these investments with the goal of being cash positive for the remainder of the fiscal year.

Samuel Struhsaker of Truist Securities asked for more detail on the Kira joint venture and its potential scale, and also questioned if AAR has seen any change in MRO demand given some airlines are discussing capacity reductions.

Answer

CEO John Holmes described the Kira JV as a modest but strategic growth vector, enabling AAR to bid on certain DoD contracts it couldn't access alone. He also expressed strong confidence in MRO demand, stating that core customers have reaffirmed their commitment and would likely cut maintenance work from other providers before AAR, securing AAR's position.

Samuel Struhsaker of Truist Securities asked for more detail on the joint venture with Kira and its potential scale. He also inquired if recent airline announcements about capacity reductions have changed AAR's view on MRO demand.

Answer

CEO John Holmes described the Kira JV as a modest but strategic vector for growth, allowing AAR to bid on certain DoD contracts it couldn't access alone. On MRO demand, Holmes expressed high confidence, stating that AAR's core customers have reaffirmed their demand and would likely cut maintenance work from other providers before reducing their volume with AAR, securing its position despite broader market shifts.

Samuel Struhsaker asked about remaining operational improvement levers and how to weigh them against the burn-off of low-margin backlog for margin expansion. He also requested more detail on demand by product or end market.

Answer

CEO William Ballhaus reiterated the three margin drivers: improving backlog margin, continuous operational efficiency, and operating leverage. He noted that Q4 demonstrated the positive impact of a better margin mix. Regarding demand, he stated that while conversations about increased production are active across domestic and European primes, it is too early to factor them into the outlook.

Samuel Struhsaker sought more detail on commercial aerospace destocking trends, noting a potential sequential increase in revenue. He also asked if the record-high Electronic Systems margin is sustainable and requested clarification on the timing of the Apache rotorcraft program's contribution to revenue.

Answer

SVP & CFO Suman Mookerji explained that the destocking impact from Boeing and Spirit persists and that some sequential revenue improvement was due to Ducommun's own 'build ahead' activities. He cautioned that the high Electronic Systems margin was boosted by a favorable product mix and is not a new baseline. Chairman, President & CEO Stephen Oswald clarified that the Apache program was a headwind in Q2 but is expected to get final approval in August and begin shipping in September, contributing to H2 results.

Samuel Struhsaker of Truist Securities asked about the progress of the company's cost-cutting initiatives and their impact on margins. He also inquired about the net margin impact from the more favorable USM parts market and whether any revenue contribution from the AeroWear system should be expected in the current year.

Answer

CFO & Treasurer Martin Garmendia stated that the company is on track for a $5-6 million full-year benefit from cost initiatives, with about half realized, contributing to a ~200 basis point margin improvement. He noted that USM margins remain stable as new acquisitions adhere to the company's 25% IRR target. Chairman & CEO Nicolas Finazzo addressed AeroWear, stating that a revenue contribution this year is 'improbable' due to the long and complex airline adoption cycle, despite his continued optimism about the system's long-term potential and clear safety benefits.

Samuel Struhsaker of Truist Securities, on for Michael Ciarmoli, questioned the contracted business pipeline for the new MRO facilities and sought clarification on the trend for USM feedstock availability.

Answer

CEO Nicolas Finazzo clarified that USM feedstock availability remains challenged due to intense competition, not improving, and reiterated AerSale's disciplined bidding approach. For the MROs, he explained that the new aero-structure shop has significant pent-up demand from existing customers who are space-constrained in the old facility, while the new Millington facility is being actively marketed to customers. He expressed confidence that the company is well-positioned for a future increase in retiring aircraft.

Samuel Struhsaker of Truist Securities inquired about the source of Aerospace demand growth, the containment of the $1.9 million charge in the Test segment, and the finality of the U.K. litigation settlement, including the worst-case risk for legal fees.

Answer

Executive Peter Gundermann responded that Aerospace demand has been consistently strong from both line-fit and aftermarket channels for Boeing and Airbus. He acknowledged there is potential for further risk in the Test segment, which is why a deep-dive review is underway. Regarding the U.K. litigation, Gundermann confirmed the potential $7.2 million in legal fees is the worst-case scenario, though an appeal is likely, which could extend the timeline into mid-2026. He also noted the related Germany case may resume in 2026.

Samuel Struhsaker asked for the rationale behind maintaining the full-year guidance for the Industrial segment, given the downward revisions seen across the broader sector. He also requested more specific detail on the current production rates for Boeing and Airbus platforms that Barnes is manufacturing for.

Answer

President and CEO Thomas Hook expressed confidence in the Industrial guidance due to internal momentum. He cited reconfigured leadership teams, progress from the Barnes Transformation Office (BTO), improved sales funnel visibility, and traction from new products as factors that will allow them to meet expectations despite tough market conditions. Regarding OEM production rates, Mr. Hook noted significant industry-wide uncertainty for 2024 and 2025. He explained Barnes is consciously maintaining capacity to stay synchronized with customers, which is an investment that creates short-term inefficiency but ensures they are not a rate-limiting factor when the ramp-up occurs.

Samuel Struhsaker from Truist Securities questioned the confidence in maintaining the Industrial segment's guidance amid sector weakness and asked for specifics on current production rates for key aerospace platforms.

Answer

President and CEO Thomas Hook expressed confidence in the Industrial segment, citing momentum from the Barnes Transformation Office (BTO), new leadership teams, and new product traction in Molding Solutions that are helping to offset market headwinds. On OEM production rates, Hook noted significant industry uncertainty for 2024-2025 and stated Barnes is intentionally maintaining capacity and labor ahead of demand, accepting short-term inefficiency to avoid being a future bottleneck for its customers.

Samuel Struhsaker of Truist Securities, Inc. asked for details on the drivers behind lower productivity at certain Aerospace OEM facilities and for an outlook on the sales trajectory for the recently acquired MB Aerospace. He also inquired if Barnes is seeing the same extended 18-24 month visibility in the aftermarket as others in the industry.

Answer

CEO Thomas Hook explained that OEM productivity challenges stem from a mix of inconsistent supply chain inputs and lower-tenured labor, noting that leadership changes and additional resources are in place to drive improvement through 2024. He confirmed that Barnes is seeing a robust aftermarket environment, with slower new aircraft deliveries shifting more work to key legacy engine platforms like the CFM56, which benefits both the legacy and acquired MB Aerospace businesses.