Hello, and thank you for standing by. Welcome to AAR Corp's second quarter fiscal year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Chris Tillett, Vice President of Investor Relations. You may begin.

Good afternoon, everyone, and welcome to AAR's fiscal year 2026 second quarter earnings call. We are joined today by John Holmes, Chairman, President, and Chief Executive Officer, and Sarah Flanagan, Interim Chief Financial Officer. The presentation we are sharing today as part of this webcast can be found on the Investor Relations section on our corporate website. Before we begin, I would like to remind you that the comments made during the call include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's earnings release and the Risk Factors section of the company's annual report on Form 10-Ks for the fiscal year ended 05/31/2025. In providing forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-GAAP financial information will be discussed during the call today. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is set forth in the company's earnings release and slides. A transcript of this conference call will be available shortly after the webcast on AAR's website. At this time, we would like to turn the call over to AAR's Chairman, President, and CEO, John Holmes.

Great. Thank you, Chris, and welcome, everyone, to our second quarter fiscal year 2026 earnings call. This was another outstanding quarter for AAR as we generated strong results across all areas of our business. We also completed two key strategic acquisitions and announced the third, which is expected to close in our fiscal fourth quarter. We are excited about these acquisitions as they enable us to accelerate our strategic objectives in two key areas of our business: our high-growth parts supply business segment, specifically new parts distribution, and in our repair and engineering segment. Turning to slide three, I would like to start with the key takeaways from the quarter. First, we delivered strong financial results with sales growth across all segments. Our 16% total sales growth was led by our parts supply business, which was up 29% in the quarter. This growth was driven by above-market organic sales growth of 32% in our new parts distribution activities. This has been our fastest-growing activity, averaging more than 20% organic growth in each of the last four years. Our two-way exclusive distribution model resonates with OEMs and is helping to drive continued market share gains. Second, we strengthened our portfolio with two strategic acquisitions. We previously shared that we are committed to enhancing our offerings with targeted acquisitions that advance our strategy, and we are delivering on that promise. Third, we continue to capture new business across the company, including the renewal of key exclusive new parts distribution agreements, as well as new customers for Traxx. In addition, we are continuing to enhance our digital capabilities, including through our newly announced partnership with Arrow Exchange, the premier commercial aviation supply chain secure network provider. Fourth, we are carefully managing our balance sheet to maintain strategic flexibility, and we ended the quarter…

Thanks, John. Looking now to slide eight. Total sales in the quarter grew 16% year over year, including 12% organic growth to $795 million. We drove growth in each of our segments, with particular strengths in parts supply. Sales growth to government customers increased 23%, and sales to commercial customers increased 13% over the same period last year. For the quarter, total commercial sales made up 71% of total sales, while government sales made up the remaining 29%. Compared to the same quarter last year, adjusted EBITDA increased 23% to $96.5 million, and adjusted EBITDA margins increased to 12.1% from 11.4%. Adjusted operating income increased 28% to $81.2 million, with adjusted operating margins improving 100 basis points from 9.2% to 10.2%. Our focus on improving operating efficiencies, strong performance in our Parts Supply segment, and government programs were key drivers of the improved margins. The combination of sales growth and margin expansion resulted in a year-over-year adjusted diluted EPS increase of 31% to $1.18 a share from 90¢ a share in the same quarter last year. With that, I'll turn to the detailed results by segment, starting with part supply on slide nine. Total parts supply sales grew 29% from the same quarter last year to $354 million. We once again saw above-market growth in our new parts distribution activities, which grew 32% as compared to last year, excluding the contributions from ADI. Second quarter parts supply adjusted EBITDA of $46.5 million was higher by 37%, and adjusted EBITDA margin increased to 13.2% from 12.4% in the same quarter last year. Adjusted operating income rose 35% to $42.8 million, and adjusted operating margins also increased from 11.5% to 12.1%. Higher margins were largely driven by increased operating leverage as we are successfully scaling our business while maintaining cost discipline. Turning…

Software.

As we look to Q3, we expect to be cash positive in the quarter. We also expect interest expense to be slightly lower than the prior quarter. With that, I'll turn it back to John.

Great. Thank you, Sarah. Turning to slide 14, we have an update on our outlook for Q3 and for the rest of our fiscal year. For Q3, we are expecting total sales growth in the range of 20% to 22%, which includes the impact of our two recent acquisitions. For reference, organic sales growth for Q3 is expected to be 8% to 11%, which excludes the divestiture of Land and Gear, as well as the impact of the ADI and HAECO acquisitions. For margin, we expect Q3 adjusted operating margin of 9.8% to 10.1%. For the full fiscal year, given our strong performance in the first half, and including our two recent acquisitions, we expect total sales growth approaching 17% and organic sales growth approaching 11%. In closing, I would like to highlight AAR's strength as a business and as an investment. We are well positioned in the most attractive segments of a growing aviation aftermarket. We have a broad, unique platform as a provider of parts, repair, and software that is unmatched in our industry. Our complete range of aftermarket solutions work together to drive a sustainable, self-reinforcing cycle of growth. We have enhanced our portfolio with high-quality acquisitions, and we are delivering stronger growth and higher margin. I would like to thank our talented team of global employees, particularly Sarah, for their dedication as they deliver excellence, quality, safety, and the critical work that we do for our customers every day. I would also like to thank our customers and our shareholders for your continued interest and support of AAR. With that, we'll turn it over to the operator for questions.

Thank you. Please press 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Ken Herbert with RBC. Your line is open.

Yeah. Hey. Good afternoon. Hey, John and Sarah, really nice quarter. Hey, John, maybe just to start on the parts supply, how do we think about with the 32% growth? Is it possible to parse that out a little bit more by, say, volume versus price? And if you're seeing anything unique on the price side from an airline perspective, then within volume, how do we think about maybe sort of same-store sales of that versus sort of new contract wins or expansions to the portfolio in the quarter?

Yeah. I would say great question. I would say, overall, it's volume driving that growth. So the majority of that growth is driven by volume. Sure. We've had some, you know, some price escalation with certain of our OEM partners, but that would be, you know, not the majority of that. And then in terms of same-store sales, we are seeing significant growth out of existing distribution contracts that are, again, in that, you know, kind of 20 to 30% range, which is obviously driving the overall growth. So it is volume. It is new contracts ramping up. But it's also really healthy same-store sales performance.

That's helpful. And as you think about moving here to calendar '26, the second half of your fiscal year, are there any concerns or are you seeing any risk about destocking at your airline customers after, obviously, several years of what seems to be maybe some buffer inventory level building there?

Yeah. Great question. And the answer is no. We're not seeing evidence of that. The backlog for that business gives us confidence that the growth rates that we're seeing there are going to continue. And at this point, you know, no signals that would imply any destocking.

Perfect. And just finally, if I could, the implied third-quarter margin represents a bit of a step down sequentially. I'm guessing this is really mix as you think about the acquisitions, but anything else going on besides mix in terms of sequentially second to third quarter on the margins?

No. That's the driver. As we mentioned, the HAECO acquisition, long term, that will be margin accretive. In fact, since we've gotten into it, we expect it'll be even more margin accretive than we thought when we did the deal, which is a great thing. But it is going to take us a couple of quarters to move through that integration to get there, and you're going to see the impact of that in Q3 and Q4.

Great. Thanks, John.

Great. Thanks, Ken.

Thank you. Our next question comes from the line of Louis DePalma with William Blair. Your line is open.

John, Sarah, and Christopher, good afternoon, and happy 2026.

Hey, Louis. Happy 2026.

John, you became the heavy maintenance industry leader with the HEICO Americas deal. Do you see synergies with heavy maintenance and your other businesses, such as your component repair business and also with Trax?

Yeah. Absolutely. And great question. For sure, there are synergies between the heavy maintenance business and the component business. Part of our strategy is to leverage the leadership position that we have in airframe heavy maintenance to drive volume to our component shops. Some of that comes from just having possession of the aircraft themselves. We now have well more than a thousand aircraft moving through our facilities each year, and that generates individual component repairs that we can perform. But mostly, it's going to be by doing deals with our customers where we sign up long-term commitments on the heavy maintenance side that are coupled with long-term commitments on the component repair side. And, you know, I just want to highlight we've invested a lot in proprietary systems and processes inside our hangars, and we have now achieved industry-leading turnaround time and quality. Our turnaround times are particularly important to the customers because, let's just say, a heavy maintenance visit is going to take thirty days, typical is going to take thirty days. If we can deliver that aircraft back to our customer in twenty-eight days or twenty-seven days, they love that because that's extra days that they have to put that aircraft in revenue service, and that's worth a lot. And that operational performance inside our hangars is driving the demand that we're seeing. And, you know, as I mentioned, when all this is said and done, we will have added 40% capacity, and that's sold out through the end of the decade. So that's a lot of demand. And we plan to leverage that leadership position again to drive volume through the component shops. As it relates to Trax in particular, Trax has synergy predominantly with our parts supply business. We intend to develop proprietary channels to market to sell new and used parts through Trax. And then also through component repair. The AeroStrat acquisition that we made last quarter does have direct synergy with heavy maintenance because that software allows customers to plan long-range heavy maintenance visits, which, of course, feeds directly into the heavy maintenance offering that we provide.

Excellent. Thanks, John. And also, you announced the win yesterday with Thai Airways. And I was wondering, has the landmark win with Delta Airline that you announced over the summer stimulated the pipeline, as many airlines often follow Delta's lead given Delta's role as one of the largest MROs in addition to one of the largest airlines?

Yeah. The answer is absolutely. And that's one of the reasons we were so focused on securing Delta as a win early on in our journey with TRAX because Delta is not only the largest, but it's an extremely well-respected airline amongst all airlines. And so the fact that they have selected Trax and endorsed that as a solution that can scale up to their size is hugely beneficial. And, absolutely, that has opened doors for Trax. The other thing I would just mention is that it's approximately a three-year implementation at Delta. So we're about seven months into that. It is going very well. And Delta has been willing to serve as a reference for us with other customers, which we're grateful for.

Fantastic. That's it for me. Thanks, everyone.

Great. Thanks, Louis.

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Luchak with KeyBanc Capital Markets. Your line is open.

I wanted to ask on M&A. You've been highly acquisitive as of late, and you mentioned capital allocation priorities are unchanged. Do you see opportunities for further M&A over the next maybe six to twelve months? Or is there more of a shift to integration? Just any thoughts you can provide on the M&A pipeline and what you're seeing there? And then maybe what segments you might target going forward?

Sure. The short answer is yes. We continue to believe that and continue to see M&A as a key part of our growth. And, you know, one of the things I'm particularly proud of is out of the last several deals that we've done, these have all been self-sourced. We have gone to these companies, we have developed relationships with the owners, and so all the deals that we've closed in the last three years, they've been sourced by us. So we've got very specific criteria that acquisitions need to meet. There are several other companies out there that we believe can meet those criteria, and we are actively pursuing them. We feel that we have the integration muscle, if you will, moving inside the company. We're definitely cognizant of our own bandwidth, so we want to make sure that we're successful with the integrations that are underway right now. But we also want to be in a position to curate attractive M&A opportunities and close on them.

Great. And then one more question on Trax. If you could provide any color on Trax in the customer upgrade cycle, whether that be the percent of customers that have already upgraded or the timing of when you expect more upgrades to occur. I know it's a multiyear event, but any more color on Trax would be great.

Thank you. Thanks, Michael. Now a great question there. We're approximately, I'd say, 30% to 35% of the way through the customer upgrades. And that's customer upgrades that have been agreed to but potentially not yet implemented. So we have a lot of current upgrades going on that are in various stages of implementation. Our goal is to have all of that completed by 2028. You know, like any software upgrade cycle, it may take longer, but our goal is to have the bulk of this done by 2028.

Great. Thank you.

Great. Thank you.

Thank you. Our next question comes from the line of Scott Micas with Melius Research. One moment. Mister Micas, can I have you to press 11 again? Hey, Scott. Thank you. Your line is open, Mister Micas.

Yes. Can you hear me?

Yeah. Hey, Scott. How are you?

Hey. Sorry about that. John, I wanted to ask on the ART acquisition. We're seeing a lot of airlines announcing interior refreshes as they try to better segment their cabins and increase the premium offerings. I'm just kind of wondering if you could provide what's the revenue now? What kind of growth CAGR do you see there, say, over the next three, four years? And what's the margin potential for that business?

Yeah. Appreciate the question. We didn't disclose the revenue, but what we can say is that that is one of the main reasons we decided to make this acquisition. This is a market we do participate in in a limited way today, but ART brings much-needed engineering, IT, and self-certification expertise to allow us to become a much bigger player in that market. And you hit the nail on the head. This is an area that is very strong now and expected to grow as airlines are constantly looking to refine their offering and reposition the resources inside of their cabin to meet the demand. And this acquisition puts us in a really strong position to participate in that market, coupled with our heavy maintenance offering.

Okay. And then one more quick question. I mean, just think last quarter, you mentioned there was a meaningful pickup in USM sales. Wondering if that trend continued this quarter. And are airlines maybe reconsidering retiring aircraft and parting them out just given that demand looks like it's improved in recent months and now fuel prices are pretty low.

Yeah. I would say we saw about the same level of activity in USM this quarter as we did last quarter. And I would say there has been no material change in the market in terms of since what we discussed last quarter. So it's pretty much status quo. But, you know, we're really focused, as you could tell, on the new parts distribution business, which has exceptional momentum in the market right now, and it continues to gain wide acceptance.

Okay. And then a quick one for Sarah. I just wanted to clarify. I think you said new parts distribution sales were up 32% organically. I was wondering if you could parse that out maybe between commercial and government.

Yeah. I would say in the quarter, roughly 50% of that growth came from commercial, and the other 50% came from defense. So we had a really strong quarter on both fronts.

Okay. Got it. Thank you. And nice results. Thank you very much.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Ken Herbert with RBC. Your line is open.

John, on the USM front, one of your major partners, Eftai, has announced an aero derivative IGT offering for the CFM56. It sounds like overall activity for you on that engine with Eftai may have been trending down. But do you see this potentially as a risk longer term to engine volumes perhaps for your USM business as we maybe see more traction of aeroderivative engines in the non-aerospace markets?

No. I appreciate you asking the question. I really don't see it as a risk. You know, in the immediate term, as you just indicated, Eftai, and they're a great partner, they've had such demand for these assets that we have seen our volume with them decline significantly over the last year plus. Yet, our team in the USM business has been able to continue to source CFM material out in the market to basically make up for the lack of volume with Eftai. So, you know, our skill in the USM business is finding material in the market where others cannot, and I'm very confident that, despite potentially this new demand vector for that engine, we will continue to be able to find material.

Great. Thanks, John.

Thanks, Ken.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing remarks.

Well, it looks like we have some more questions.

Yep. They just popped up. One moment. Please stand by for our next question. Our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open.

Hey. Evening. Thanks for getting me in there. Not sure what was going on, but real nice results.

Great. Thank you, Mike. Hey.

Hey, John. Just how should we think, you know, you've given sort of the annual guidance in terms of revenues. We've got some dilution on the margins. Any thoughts on how we should think about that adjusted operating margin and maybe call it a 10% ceiling when you can kind of firmly punch through that? You know, it does seem like, I guess, you know, with more of a full quarter, you kind of talked about it, you get a little bit of that dilution from HAECO. It's going to take a little bit. But anything in terms of how we should think about those adjusted operating margins going forward, taking into account the synergies, the cost out, and some of the other benefits?

Yeah. I would say, you know, first of all, we're really pleased with the trajectory we've been on. This is only the second time we've been above 10% in a quarter. We're up a full point from last year. And, you know, I think as we've said in various settings, we see the ability to achieve a couple of points above where we are now. The HAYCO integration is going to be a, you know, near-term dilution area, as you said, for, you know, the next couple of quarters. But as a result of the integration, as a result of exiting our higher-cost location in Indianapolis, we feel very good about punching above that 10% level over time.

Okay. Okay. And then just on the revenue outlook for the year, do you have any contributions from the new capacity coming online in this current fiscal 2026 guidance? Or is it going to be a more pronounced positive impact next year?

It will be a more pronounced positive impact next year. Yeah. It'll be a more pronounced positive impact in our FY '27. We will see a slight contribution from the Oklahoma City site that will come online likely in February time frame. But the Miami site will come online fully in, call it, July time frame. Both of those will be at full run rate for our FY '27.

Okay. Perfect. And then I'm going to ask you this one anyway. I get this question a lot from clients and have gotten it. Just from the rationale to expand that lower margin MRO heavy maintenance, it often gets perceived as the wrench-turning aspect of the business. I mean, to me, it makes a lot of sense, but, you know, you're kind of adding to the lowest margin portion of your business. I know you talked about the...

Yeah.

Yeah. Go ahead. Just the thoughts on maybe skewing more towards that higher margin parts business or how should we think about it? How should investors really think about that when they see deploying cash there?

Yeah. So I'm really happy that you were able to get the question in because that's one that I'm happy to answer. It is not a low-margin business. We have made more margin gains in the heavy maintenance area since over the last since coming out of COVID than anywhere else. So now that business is a low double-digit margin business with potential to expand as a result of this acquisition as we improve the fixed cost base. Not only that, you know, we now have, you know, circa, you know, 45, 50% market share. And, you know, the customers are coming to us. And so the investments that we've made in our processes that improve the turnaround, as I described, I mean, they're allowing us to, you know, to sell out through the end of the decade and, in certain cases, achieve the premium in the market. So that business, I think, is misunderstood. If you look at the margins in our repair and engineering segment, and look at them compared to other publicly traded MROs that are actual that trade differently than we do, they're actually pretty similar. And we're telling you that we can expand margins from here. So I think the historical view that airframe is a tough business, it's low margin, etcetera, it is a tough business. We've developed a model that is succeeding significantly. That's thanks to our execution and the systems that we put in place. So I'm really excited about the HAYCO acquisition and the potential for further margin expansion across all of heavy maintenance.

Perfect. That's a good answer. I appreciate it. Thanks, John. Thanks, guys.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Sheila with Jefferies. Congrats on a great quarter.

Thank you. John, maybe on the last line of questioning, if that's okay, sticking to repair and engineering. Maybe, I guess, just bigger picture, how do you think about margin expansion within the segment? And then second, as we think about HAYCO, and I know you already talked about it with Mike a little bit, how do you think about going from 3% margins or low single digits to double-digit margins? How much of that comes from the contract realignment versus the cost rationalization?

I think it's okay. So I would say, in general, in the segment, we would see going back to the levels that we were a year ago in terms of margins, so low double-digit and then expanding from there. So I would view the moment that we're in right now in repair and engineering as a low point. We've got a couple of quarters to get through as we get through the bulk of the or the real heavy lifting as it comes to the as it relates to the HEICO acquisition. Then we'll go up from there and then ultimately exceed where we were prior to this. And, again, as I mentioned, we've got the customer support and the commitments over a multiyear period to achieve all of that. So, you know, feel good about the, you know, the overall margin possibility and repair and engineering. And again, and one other thing I should mention that I'm talking about heavy maintenance. The component repair business is a, you know, mid to high teens operating margin business. And as I talked about earlier, we intend to leverage the leadership position that we have in heavy maintenance to drive more volume to component repair, which will further enhance the margins of the overall segment. It relates to the HAYCO integration in particular, it would be a mix between the revenue realignment and the cost takeout. And I should mention that we are taking the revenues down from what HAYCO was doing before, pretty significantly. And so we're bringing the volume in that facility in across the facilities down to a level we can establish our processes, establish the rigor that we want to see, we've been able to achieve elsewhere. On the floor in the hangars and then ultimately build up from there. So, you know, we're utilizing we're not utilizing the full footprint. We're rightsizing the labor force to match the volume. To get the operations performing the way we want. But then over time, we would intend to build up from here. And I should mention that we've done that, you know, successfully in several of our other existing facilities, and we're obviously doing that in Miami and Oklahoma City because we're expanding those two sites.

Yep. Great. And then maybe just switching gears a little bit. Lots of questions already on your success in parts distribution accelerating over 30% in the quarter. Can you talk about what you're expecting? You mentioned 50% of that came from government customers. You're thinking about the second half of the year?

Yeah. I would say, you know, again, we've been kind of on an annual run rate of, you know, circa 20% organic growth. And I would think that we would be, you know, slightly above that in the second half of the year.

Got it. Okay. Great. Thank you.

Great. Thank you.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to John for closing remarks.

Great. Really want to thank everybody for the time and the interest. As you can tell, we've got a strategy that's working. We're encouraged by the momentum that we have, and we expect it to continue. Look forward to getting back together next quarter. Thanks, everybody.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.