Sean Gillen: Yeah. I think that’s certainly the focus. As you heard John say, in Q4, we think we’ll be around 9%. And if you think about the continued mixed shift of Parts Supply and the impact of the Triumph Product Support acquisition, as well as Trax, all that’s accretive to margins and getting towards that 10%.
Robert Spingarn: Great. Thanks so much.
John Holmes: Thank you, Rob.
Operator: Thank you. One moment for our next question. And that will come from the line of Bert Subin with Stifel. Your line is open.
Bert Subin: Hey. Good afternoon. Thanks for the question.
John Holmes: Thanks, Bert.
Bert Subin: John, maybe just to follow up to one of the questions there. If we think about the guide for the fourth quarter, mid- to high-teen sales growth, it would seem to imply mid-single-digit organic growth versus the 9% you just did this past quarter. It seems like you gave a pretty upbeat outlook, though, on a lot of the contributors there. So what are — what’s driving the, I guess, slowdown? Is it just comps? Do you think USM’s going to decline sequentially? Because it sounds like government’s getting better. Parts distribution’s still strong. Maybe there’s a little bit of volatility in MRO. But if I put it all together, it seems like it’s maybe a little better. So can you just help me understand that equation?
John Holmes: Yeah. I’d say part of it is comps, obviously. Had some strong performance last year. So that’s certainly driving a bit of it. But your comment on government, I would say that overall, we see things improving in government, but we would not expect a meaningful improvement in this quarter. So we see similar — we see a similar dynamic in Q4 and as much as you’re going to have real strong commercial performance in trading, in commercial distribution, as well as in the hangers. But that is offset by continued softness in the government market. As we move through our FY 2025, we expect a return to growth in government, which would be a nice match to expected continued strength in the commercial markets as well.
Bert Subin: On the government point, like, if I look at the President’s budget request for FY 2025, and granted, a lot of things can change, it seems to indicate a large cycle — retirement cycle and so far, not really any indication of increased sustainment spending. Are you seeing something different than that, because it seems like there’s optimism toward government that that’s going to start to get better once we get into FY 2025. So I’m just curious where that’s coming from?
John Holmes: Yeah. We’re hearing the same things that hasn’t yet translated into orders. If you look at the stated — inventory levels across the platforms that we support, pretty much without exception, they are below the stated inventory levels to meet the expectations for sustainment. So at some point, we absolutely do expect a replenishment in parts and pallets in particular to meet those stated levels. We haven’t seen the inflection point yet. As I mentioned, the government distribution, we are seeing better months and better bookings, which could be a leading indicator that you’re starting to see that inflection, but it’s not translating yet into something we would call a significant trend.
Bert Subin: Just to clarify, I guess, the differential is more sort of weakness in parts and government MRO is steadier and so parts is the opportunity?
John Holmes: Government MRO has been steady. The government distribution business, yes, is the opportunity in the Parts business. For government overall at AAR, we’ve got opportunities to grow in the government programs business, so the supply chain programs. We have a number of bids out there that have not yet been awarded. We would expect to see awards come out this calendar year. They take a while, but when they happen, they’re big. And then again, you’ve got the Expeditionary business, the Mobility business, that you’ll see improvement there once the pallet awards start to come through. So you’ve got a few different buckets in the overall AAR government business.
Bert Subin: Got it. Okay. Just one last one for Sean. You gave some color on maybe getting closer to 10% as we think about next year. Can you just break down where Parts Supply falls into that? It seems like there’s maybe an opportunity. USM, I assume, is sort of flattish, but maybe as parts distribution matures, there’s an opportunity? And then I guess as a follow-on to that, can you give us any color on how to think about free cash? Does that start to moderate post some of the parts distribution or does that start to get better post some of the parts distribution growth?
Sean Gillen: Yeah. And I think as you think about the margin improvement for the company, Parts Supply has been a big part of that. And if you think about next year, we do think it’ll continue to be the highest growing part and the highest growing segment, specifically led by commercial distribution, but also continued growth in USM and Parts Supply operating margin is close to 13%. So we’re creative to the overall company and it will help drive that improved margin outlook next year. And then in terms of free cash flow, good quarter, $20 million of operating cash in this quarter. If you look earlier this fiscal year, a little bit heavier on the inventory investment to help drive some of that growth. As we get into this next fiscal year, obviously a big focus on generating cash and delevering, as well as growing EBITDA.
So I think you’ll see a little bit better free cash flow performance on that, with the caveat that the USM market, as John talked about, remains dynamic and we continue to be in a good position to source new material to meet that demand that’s growing.
