Hello, and thank you for standing by. Welcome to AAR Corp. Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Chris Tillett, Vice President, Investor Relations. You may begin.

Good afternoon, everyone, and welcome to AAR's Fiscal Year 2026 Third Quarter Earnings Conference Call. We're joined today by John Holmes, Chairman, President and Chief Executive Officer; and Dylan Wolin, Chief Financial Officer. Presentation we are sharing today as part of this webcast can be found under the Investor Relations section on our corporate website. Comments made during the call will 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-K for the fiscal year ended May 31, 2025. In providing the 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. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are set forth in the company's earnings release and slides. At this time, I would like to turn the call over to John Holmes.

Great. Thank you, Chris, and welcome, everyone, to our third quarter fiscal year 2026 earnings conference call. I'll begin with key messages for the quarter on Slide 3. First, this was another outstanding quarter for AAR. Our focused business model is driving growth that is delivering durable results in both commercial and government end markets as evidenced by our third quarter performance. . Second, we continued our momentum in the quarter and delivered 25% growth in total sales, 31% growth in adjusted operating income and 26% growth in both adjusted EBITDA and adjusted earnings per share for the period. We saw growth across each of our parts, repair and software platform activities in the quarter. Total sales increase included 14% organic adjusted sales growth led by 36% organic growth in our new parts distribution activity. Third, we are continuing to execute across key initiatives advancing our strategic priorities. For example, in Repair & Engineering, the integration of HAECO Americas is ahead of schedule, and our hanger expansions are on track with Oklahoma City now complete, and I am expected to be operational later this summer. In parts supply, ADI is performing above expectations, and we continue to drive outsized growth in our new parts distribution activities. Also, our Trax software platform continues to gain momentum by growing its base of recurring revenue with new and existing customers. Finally, we are carefully managing our balance sheet for their strategic flexibility as we maintain our disciplined approach to capital allocation. We ended the third quarter with net leverage within our target range, supported by our strong operating cash flow in the period. Before I go to Slide 4, I would like to welcome Dylan Wolin back to AAR as the company's new Chief Financial Officer. Dylan was with the company from 2017…

Thanks, John. Looking at Slide 5. Total sales in the quarter grew 25% year-over-year, including 14% organic adjusted sales growth to $845 million. We drove revenue growth in each of our parts supply, Repair & Engineering and Integrated Solutions segments. Sales to commercial customers were up 27%, while sales to government customers were up 19% over the same period last year. For the quarter, 73% of our sales were to commercial customers and the remaining 27% were to government customers. Adjusted EBITDA in the quarter increased 26% year-over-year to $102.1 million and adjusted EBITDA margin increased to 12.1% from 12.0% a year ago. Adjusted operating income was up 31% to $86.2 million and adjusted operating income margin improved 50 basis points to 10.2%. The margin improvement in the quarter was driven by part supply and integrated solutions, including tracks and government programs, despite the expected short-term impact on margins from our recently acquired HAECO Americas business, at which we are in the process of rightsizing the revenue base, adjusting the cost structure and deploying our proprietary processes. Excluding HAECO Americas, adjusted EBITDA margin in the quarter would have been 70 basis points higher or 12.8%. This was the most critical integration quarter for HAECO Americas, and we expect sequential margin improvement going forward as we move through the remainder of the integration process. Finally, I'll mention that we recorded a gain in the quarter due to the accounting for our HAECO Americas acquisition, resulting in a bargain purchase. The gain reflects the excess of the fair value of the assets acquired over the purchase price and is excluded from our adjusted results. Adjusted diluted EPS was up 26% year-over-year to $1.25 per share, driven by our strong operational performance. Turning to parts supply on Slide 6. Total part supply sales…

Thank you, Dylan. Turning now to Slide 10 for an update on our outlook for the remainder of the fiscal year. For Q4, we are expecting total adjusted sales growth of 19% to 21%. Organic adjusted sales growth for Q4 is expected to be between 6% and 8% as we lap what was a very strong Q4 last year. This excludes the debenture of landing gear as well as the impact of fiscal 2026 acquisitions. We expect Q4 operating margin of 10.2% to 10.5%. Our outlook for Q4 has improved from what was implied in our guidance last quarter, given the ongoing strength we see across our markets. As a result, our full year expectation is for total sales growth of approximately 19% and for organic sales growth of approximately 12%, which is up from our prior outlook. . Finally, on Slide 11, I'm excited to share that AAR will be hosting an Investor Day on May 12 in New York City. AAR has been driving strategic transformation over the last several years, and we have a more focused, complete range of aftermarket solutions in parts repair and a software platform that worked together to drive growth. As the last several quarters have shown, this strategy has yielded results. At our event in May, we plan to share our strategic vision of how we will continue to cement our position as the independent leader in aviation aftermarket through our repositioned portfolio, focused strategy and differentiated culture. We hope to see many of you there. Before we open it up for questions, I'd like to thank our talented team members around the world as they drive excellence in quality, safety and service and the work we do for our customers. I'd also like to extend a thank you to our customers and shareholders for their ongoing support of the AAR. With that, we'll turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Michael Ciarmoli with Truist.

I guess, John, just on the topic everybody is asking about with oil prices kind of what we're seeing with some of the carriers trimming capacity. I mean historically, you've been in this business long enough. I mean, is there some sort of proxy you could give us how long do we need to see elevated fuel or once we start seeing some of these capacity cuts by the airlines, will that -- if it will at all translate into your business and fully realizing nobody is parking planes yet. They're just maybe trimming some routes. But any color you could give us there from a historical context?

Yes. I would say that the #1 thing is -- and I appreciate the question. The #1 thing is that fundamental demand for air travel remains very strong. That's what you're hearing from all of our major customers. And obviously, we're hearing that from them every time we talk. And they've continued to see record bookings even after the conflict started. I would say, just to your point, what you're seeing now are modest capacity adjustments and they're not impacting any airlines individual fleets. . And so adjustments like that are not going to have any meaningful impact on the demand for Parts or Maintenance. So at this point, we feel very good. All the customers are talking to us about strong bookings and being prepared for a very busy summer, and they're making those plans with an assumption that fuel prices are going to remain elevated through that period of time, which we view as encouraging because they're factoring that in, yet their demand signals to us are still very strong.

Okay. Okay. That's helpful. And then maybe just on the more positive side, I mean, you guys continue to do really, really well on distribution that organic 36% on new parts, can you maybe just disaggregate that for us a bit? I mean, what was kind of new wins? What was same sale -- same-store sales, maybe pricing? I mean, just really strong growth. I mean you guys are doing a great job there.

Yes, we're very proud of the continued growth we see in distribution, and our model there is clearly resonating. To your question, about 2/3 of the growth was same-store sales, so continued growth from contracts that have been in place for some time. And the remaining 1/3 was mostly new contract wins a little bit of price across all of them, but the majority of the growth, about 2/3 of the growth came from growth from existing contracts.

Got it. Is it -- the name jump out. Was it engine-related, airframe-related avionics, any -- or strength across the board that you're seeing?

Great, across the board. But again, I would highlight the continued growth in Defense distribution. We've got a great offering there, and that was 55% organic in the quarter. And that though, we've been seeing a build. That wasn't a one-off. We've been seeing a build in growth in defense sales to the government. And certainly, our offering is resonating, and it reflects this administration's clear prioritization of sustainment and readiness. .

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Maybe to follow up on Mike's question. As you think about your new parts distribution business in Repair & Engineering, I know we're only seeing modest capacity cuts. How do you think about how quickly behavior has changed historically and what your visibility looks like in each?

Yes. I mean we've got solid visibility currently through the quarter and the guidance we just provided, and I would extend that to the summer as well because that's what everybody is planning for right now. We've been in constant contact with the customers, -- we have not seen any material change in demand for maintenance lines or component repair. And you would have to see, I would say, a much more significant changes to their fleet plans for that to have any meaningful impact on our results. The other thing I would say is that if I think about this moment that we're in relative to historical mods, AAR is in a much different position in the marketplace. And I would say that we've been so focused on delivering superior service and quality to our customers that we feel pretty confident that they would deprioritize other vendors before they did anything with us.

Got it. And maybe if I could ask another one, really great execution this quarter. You held margins flat sequentially and are guiding to an improvement in Q4 given -- even with the HAECO dilution that's ongoing. So maybe can you give us some flavor into the sources of the outperformance? You called out ADI and HAECO outpacing expectations. Anything else notable?

Those would be the big ones. ADI, the second quarter there of outperformance. HAECO, it's a lot of work. It's a lot of work to complete that integration. As we mentioned, this was the most critical quarter and we've been able to move some of our timetables up. So happy to say if we're going to be at the earlier window. I would also highlight this was a really strong quarter for Trax. Great momentum from a sales and margin perspective with Trax. And that's something we've been focused on growing, as you know. .

Our next question comes from the line of Ken Herbert with RBC Capital Markets.

Maybe first, If we look at your commercial aftermarket, John, the commercial business broadly, how much of that business would you characterize as book and shift for short cycle versus more sort of backlog driven? And I know, obviously, a lot of the heavy MRO piece of the business is now much more backlog-driven than maybe it was previously. But is there a way you would frame up that maybe that way to look at your business?

Yes. As you pointed out, heavy maintenance is definitely backlog-driven. Much of the distribution business is backlog driven. Those are, I would say, the 2 -- and obviously Trax with us in its own category, but those would be the 2 long-cycle elements of the business. component repair tends to be a bit more short cycle. And also -- and obviously, USM is a shorter-cycle business. But the majority of the revenue now in commercial between distribution and heavy maintenance is longer cycle.

Okay. Helpful. And obviously, really nice cash generation in the quarter. Can you give any commentary on what we should expect fourth quarter, which typically seasonally is very strong from a cash generation standpoint? And maybe any highlights either for you or Dylan on specifically some of the -- what we saw in the third quarter in terms of the strength?

Great. Yes. No, we were really pleased with the cash flow results and customers paid us on time. So we're appreciative of that. And as it relates to the outlook for the rest of the year, we are planning to be cash flow positive in Q4 and again -- and cash flow positive for the whole year. .

Our next question comes from the line of Scott Mikus with Melius Research.

Quick question. I know it's still early in the war in Iran. How long does this potentially have to drag on before it starts maybe impacting your ability to source any of the parts you need in your part supply business? And then in contrast, could the worst stimulate demand for your component repair business if airlines are seeking to reduce maintenance costs to offset the higher fuel costs?

Yes, great question. I wouldn't expect at this point that the war or the conflict at any length of time would impact the supply of material. I mean, unless you're talking about USM specifically and certainly, if for any reason, you see more aircraft retirements and subsequent teardowns, how that would result in more supply for that material. But in terms of the war or the conflict stimulating demand, Yes, I mean it could stimulate demand in a number of ways, obviously, on the defense side, and we're highlighting a few of those in the results. But then also, I mean, we are in many ways, a lower cost alternative to OEMs and other providers. We have seen this in prior cycles where we're able to win business as an alternative to OEMs with airlines what to reduce their costs.

Okay. Got it. And then I wanted to follow up, the organic growth guide in the fourth quarter implies a deceleration but you should be getting some revenue contribution from the OKC capacity expansion. So is that kind of just some conservatism baked into the guidance? Or is there any pull forward into this quarter from a top line perspective?

Yes. No pull forward into this quarter. Really, the impact you're seeing in Q4 is just lapping a really tough comp from last year. We had a really strong quarter in Q4 last year in a number of ways. And the guide there is reflective of that. But the guide is improved from what we implied with the Q3 guidance we gave last quarter.

Next question comes from the line of Noah Levitz with William Blair.

Yes. To start off, you gave a lot of good color on Trax and the implementation. But kind of drilling in on that, you mentioned that Delta, that the partnership with them has been deployed to 2,000 users and you expect 6,000 in the coming months. I'm curious like the 6,000 like the ninth inning? Or are you still early innings in the Delta deployment? And then following off of that, can you give a little bit more color on the time line for track establishing kind of that part Smartplace aspect of the business?

Yes. Great set of questions. So I'm glad you asked about the Delta implementation. So kind of two ways to think about the Delta implementation. It's the whole thing will take approximately 3 years, and we're coming up on 1 year into that, and there's 3 modules. The first module is, I would say, basic functionality deployed across a large user base. So we've got basic functionality up and running. . And were deployed roughly 1/3 of the way across the user base of Delta. So that -- once all those 6,000 users have this first module in hand and working, that completes the first phase. The next 2 phases, Phase II and III, we'll be focused on deploying additional functionality to that large user base. And that is still -- and that's where the material ramp-up in the activity and the revenue delta will occur. And so that will start a few months from now and ramp through over the following, call it, 6 or 7 quarters. And then as it relates to the parts marketplace, something we are still very focused on and we do expect to go live on that and launch it yet this calendar year.

Awesome. And then just 1 follow-up. The defense business is, I mean, more or less killing it, the 55% organic growth and government distribution is really impressive. In the slide deck, you do mention that higher-margin government work was a positive contributor. I think more so in the Integrated Solutions segment, is that something that you're expecting to continue as more or less like a new norm? Or was that more like a positive benefit this quarter that was somewhat unexpected. How should we think about specifically government margins on an improving basis going forward?

Yes. You are referring to the margin improvement in the government portion of integrated solution government programs specifically. And that reflects sort of a mix shift towards higher-margin programs within government programs, and we do expect the benefit of that mix shift to continue going forward.

Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

I wanted to follow up on the HAECO question, just given that that's progressing ahead of schedule. I know there was a cost element to the synergies there, but could you talk about how that integration is progressing in terms of cost-outs or operational efficiencies or just overall utilization, is there any way to bucket the primary drivers of that integration going ahead of schedule? .

Yes. So just to describe it in a little bit more detail. We've got to rightsize the business in a couple of different ways. They had -- it was a much larger business in terms of revenue than how we intend to run it. because that revenue was not profitable. So we are continuing to close up those aircraft that we no longer be customers with us and ship them off. That work is getting done. At the same time, we're also making difficult decisions around the size of the workforce because we want to size the workforce to the new revenue base that we have. Those changes have been made. And when we say this was the most critical quarter. The changes to the size of the workforce to align with the new revenue base, all of those changes have been made. So that's in place. The last 2 major pieces are moving the work out of our Indianapolis facility and moving that into other AAR facilities, majority of which will go to HAECO and the GreenVille site and the happening now. And that's happening now. So that's the next significant phase. In the final phase that will be complete after all of that, but it's all going on in parallel is the implementation of our systems. We are certainly taking our rigor and our expertise in deploying it on the floor today. But ultimately, the paperless system that we've developed and utilized most of our AAR hinders, we want that fully deployed inside of the HAECO facilities as well. So that would be the very last piece to complete. But again, all of that at this point is pacing ahead of schedule. And it's a really heavy lift. You got a lot of moving parts there, but very proud of the way the team is executing. And also really happy with the way the HAECO team has embraced the culture that we're promoting. It's been a really good fit.

Great. And then within Integrated Solutions, just given the recurring revenue nature of the Trax business as well as the new customer integration and ongoing upgrade cycle, should we expect growth there to be fairly linear going forward within the segment? Or is there anything that could drive lumpiness ahead?

Overall, Linear, you do get lumpiness every now and then because of the way we book new implementations just based on the software and milestone accounting. So that does create some lumpiness in the results there. But the recurring revenue, which is the base of the business that we're most focused on growing that we expect to be linear. And again, we've doubled the size of track since we bought it. They were a $25 million business when we closed that pacing north of $50 million now. And based on the customer updates, their upgrades as well as new customers that we've captured we see a path to doubling that again from $50 million to $100 million.

Thank you. Ladies and gentlemen, at this time, I would like to turn the call back over to John for closing remarks.

Great. Thank you very much, and thank you for joining us today. We continue to execute with a high degree of discipline, and we are energized by the opportunities in front of us and really appreciate the support and interest in AAR. .

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