AAR Corp (AIR) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the AAR Corporation fourth-quarter fiscal 2007 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this program is being recorded.

I would now like to introduce your host for today's program, Mr. John Bowman, Director of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning ladies and gentlemen and thank you for joining this morning's conference call. Before we begin we would like to remind you that certain of the comments made today relate to future events which are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please refer to the forward-looking statement disclaimer contained in the press release issued this morning as well as those factors discussed under our Item 1a entitled risk factors included in the Company's May 31, 2006 Form 10-K.

By providing forward-looking statements, the Company assumes no obligation to update the forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

At this time, I would like to turn the call over to our Chairman and CEO, David Storch.

Thank you, John, and good morning everyone. Joining me today is Tim Romenesko, who many of you know and Tim now serves as President and Chief Operating Officer of AAR; and Rick Poulton, our newly named Chief Financial Officer. As many of you know, Tim served as Company CFO since 1994, is an exceptional leader with a thorough understanding of our markets and operations. The goal here in this management growth here is to free up more of my time to focus on innovation, business development and culture. While Tim's focus will be on segment growth, segment sales growth, improving our operational performance and execution.

I might remind many of you who are aware of the AAR story, Tim and I worked side by side in the 80s as we built the engine business here at AAR from zero to over $100 million. The focus at that point in time was basically myself external on the producing side and Tim on the internal and processing side and we drove some very impressive numbers during that period.

So now as we reach the $1 billion sales mark, we are looking at things in a similar fashion. It allows me to free up externally and to continue this tremendous growth rate while Tim is focused on the internal operations, improving our margins and our overall performance.

Also Rick is an outstanding addition to our leadership team. He is an aviation industry veteran with over 15 years of financial leadership experience. Rick came to us last September and prior to that he held senior level executive positions within United Airlines.

I am extremely pleased that we broke new ground this year, achieving quarterly sales in excess of $300 million and annual revenues exceeding the billion dollar mark for the first time in our history. I might add of course that we are even more pleased to achieve record income and earnings per share numbers. These records were driven by performance across the board with value-add supply chain solutions, aftermarket replacement parts, airframe maintenance, landing gear overhauls, specialized mobility products, and activity in our Aircraft Sales and Leasing segment, all contributing to this exceptional growth.

And we achieved double-digit sales growth in all four of our operating segments for the quarter and for the fiscal year. So we have a lot to be proud of.

At May 31, 2007 our backlog increased 31% to $320 million from the prior year due mainly to strong bookings at our mobility systems business. Also keep in mind we have books of additional business that we talked about in the release post the close of the fiscal year. Also keep in mind that the backlog does not include future revenues from our largest program, the manufacturing of the A400M cargo system which we expect to begin to ship towards the end of our current fiscal year, fiscal year 2008.

I would like to turn my attention a little bit to Indianapolis. We are currently providing eight lines of maintenance in seven hangars at our Indianapolis facility. Our primary customers have included Southwest, United Airlines, Northwest, and a large package carrier. We are doing a great job of earning our customers' confidence in Indianapolis. Now we have to do a better job of making money at the facility and we know what we have to do to improve profitability which is fundamentally around aircraft scheduling, labor and material utilization.

We exceeded our SG&A as a percentage of sales goal of 10%. First time in the Company's history, we got below 10% for the fourth quarter and the year as we continued to leverage our cost structure. Our operating margin was 9.2% for the fourth quarter and 9% for the year. Although we have made meaningful progress towards our stated goal, we fell short of 10% primarily as a result of lower margins at Indianapolis and our airframe component repair shops.

We have taken, as you can see by the release, we have taken major steps to grow our aircraft business as we just recently agreed to acquire 21 aircraft including 18 narrow body and one wide-body aircraft through joint ventures and two narrow body aircraft for our own account. We will be closing on these aircraft in the next seven days. All 21 of these aircraft are currently on lease. Three of the aircraft -- to give you a sense of the age of the aircraft -- three of the aircraft were manufactured in '89; six in '92; nine in '93; two in '94; and one in '97. So they are fairly current aircraft. We think we have acquired these aircraft at advantageous levels and we are looking at this as a wonderful opportunity to grow, continue to grow our aircraft sales and leasing segment.

In addition to the aircraft transaction, we are entering the new fiscal year with a lot of momentum and hitting the ground running. The $31 million shelter order we announced this morning is additive to our May 31 backlog as I indicated earlier and Southwest Airlines has selected us to provide an additional line of maintenance in our Indianapolis facility which will commence later this month.

In Europe and Asia, we are exploring opportunities to expand our supply chain capabilities and win new programs. And as we have communicated earlier the Reebaire acquisition in fiscal 2007 doubles our regional MRO capacity and the Brown acquisition provides a broader range of solutions to our defense customers. Both of those facilities, both of those businesses are contributing to the Company and both are under margin improvement plans so that they can as time passes on, they will contribute favorably to the operating margins at the Company.

We are very focused on other growth opportunities in both the regional and defense markets as well. So it remains a very exciting time for the Company. And I would like at this point in time to open up the lines to any questions that you may have.

(OPERATOR INSTRUCTIONS) Arnold Ursaner, CJS Securities.

Hi, good morning. Sometimes in your press release you provide segment margin. Can you give us those numbers, please?

Sure, Arnie. Aviation Supply Chain had gross profit of $32.4 million; the MRO segment had gross profit of $9.3 million; Structures and Systems gross profit of $10.9 million; and Aircraft Sales and Leasing had gross profit of $3 million.

Okay. Second, can you give us the revenue contribution from the Brown acquisition so we can get a better feel for organic growth?

Yes, Brown contributed approximately $12 million of sales.

For the quarter?

Yes, since we bought them in early April, so yes, for the quarter.

Got it. Let me just check my notes here one more second. On Indy, obviously you are making some progress there. You are filling in some more of the bays and hangars. Can you comment on the labor situation there? Perhaps give us a little better feel for the actual revenue contribution from Indianapolis and your opportunity to perhaps offload some of the less attractive work to Reebaire or other facilities to improve the profitability of Indianapolis?

Arnie, it's Tim, how are you?

Okay.

The labor situation is manageable. It is not a significant impediment for us right now. As I have talked to you about and others, our focus here at Indianapolis is improving the profitability and we have got a series of initiatives in place. As you know, we have got a wonderful facility. We have got a great customer base. We have got good utilization of the plant and it is still a very young business. It is coming up the learning curve and we are very optimistic about our prospects of improving the profitability here over time.

Okay. And again, is there an ability to shift some of that work to Reebaire?

No, no. Reebaire is a regional maintenance center and Indianapolis is a narrow body. So no.

Final question from me, if I can, on North Carolina you are running through a start-up mode. Did you incur some duplicate costs or is there any way to quantify the impact it is having on your margins at this point?

It is relatively minor. There is some duplicate costs there but we are also -- you know in addition to doing the cargo systems manufacturing down there, we are also doing -- satisfying some of the excess workload that we have for mobility products and building that down there. So yes, there is some relatively minor duplicative costs but on balance, it has been a great capacity addition to the Company.

Tim, look forward to seeing you in August at our conference. Thank you.

Troy Lahr, Stifel Nicolaus.

Thanks. When you guys talked about kind of tracking towards 10% operating margins in fiscal 2008, can you kind of talk about what are some of the drivers there and are you being pretty conservative with that or how comfortable are you with that 10%?

Well we are comfortable with it. The drivers are number one I would say, continuing to leverage our relatively fixed cost structure which we have been able to do. I think in the fourth quarter, the incremental operating margins were 12% or 12.5%, something like that. We also are looking for improved operating margin contribution from a few of our businesses.

So I think the combination of leveraging our cost structure with our sales growth and operating improvement across a couple businesses that are under contributing now as well as some of our margin enhancement initiatives through lean processes, our strategic sourcing initiative, should all contribute to improved margins.

Okay. And can you kind of maybe give us a framework or what your outlook is for revenue in fiscal 2008? Maybe just kind of directionally or just kind of ballpark it for us?

Yes, I think we would stick with our mid-teens revenue growth.

Okay. And with the Southwest work that you booked after the quarter, do you expect more work to continue or do you think that this is it for a little while? You are going to work through this and then maybe 12 months down line you could get some more work from Southwest or what is the outlook there?

Well, I think that there is a possibility of more work from Southwest and from others.

Okay. In the near term, would you classify it as near term?

And we are also doing other work for Southwest. You know outside of Indianapolis, we are doing landing gear work as well as component repair.

Okay. Thanks, guys.

Christine Min, Calyon Securities.

Hi, good morning. On the Aviation Supply Chain, do you see or can you talk about the overall environment currently? Do you see a further deceleration in growth for the next couple of quarters?

No, as you can see, we have had good performance coming out of that group and that performance is -- we cover both defense and commercial markets. And we anticipate that those markets will continue to stay strong for the Company. The Company, as you know the Company has a worldwide leadership position in this market and we expect that the trends will continue to look favorable and our position you know is a strong position. So we anticipate that this business will continue to perform well.

We have a great team in place, good momentum, good backlog, good customer coverage and no reason why that shouldn't continue.

Okay. And on the aircraft leasing side, how much of the equity in JV earnings this quarter came from leasing versus the sale of aircraft?

We don't really break that down but from time to time we are going ahead and selling an airplane or two. I think in this period we may have sold one. I don't recall exactly but you know you have a blend between the two. Clearly with the investments we have signaled here that we have made here post quarter close, there will be more income coming from lease revenue than we have had historically. The fleet size for the first time is north of 40 aircraft and we anticipate that the revenue from leases will be meaningful as we will also continue to look to trade out of the assets from time to time as well.

Okay, great. Thank you.

Peter Arment, JSA Research.

Good morning, gentlemen. Just wanted to follow up on, David, on the Aviation Supply Chain growth. I mean you have been running I guess last couple of quarters you know lower double digits than the previous first half of the year. Is that sort of more a range that you are comfortable in the lower double digits versus I think the last couple of years has been up 18% plus.

I think in the quarter you had 14% sales growth so it is lower than 15%. I understand that. But it is still the middle double-digit range and you know, I think as the obviously the base continues to grow, it is the first time this business had revenues in excess of $500 million, I think for the year $543 million if I remember correctly. And I think that we will continue to see mid double-digit sales growth.

As Tim signaled for the whole corporation that is kind of our target and of course this represents 50% of our total volume today. So I would be -- I would be thinking that it will continue to go in that fashion.

Okay so nothing structurally has changed, just a function of sort of the timing and mix in numbers and customers, right?

Yes and I think also the base. So you know obviously when sales were growing at 20%, you had a lower base. But I think that this -- the quality of the earnings out of this business are exceptional and you know I think attaining the double-digit earnings growth is at least a very strong contribution to our operating income growth as well. So we are not experiencing unusually strong growth as we might be in other aspects of the Company. But in other aspects of the Company, we are not achieving the same margins because we are dealing with tackling the exceptional growth.

So I am very pleased with the mid double-digit growth for that business and to continue to sustain the operating margin you know throughput that we have been experiencing. So I feel good about the business. I feel good about the growth rate. The returns all in all it is obviously it is a very solid part of our total business mix.

Okay. And was there an -- Rick, maybe you can answer this on the aviation -- the aircraft sales and leasing segment had $14 million in revenue. Was there an aircraft sold this quarter?

There was. There was one aircraft sold, a 737 400.

So it had good operating margin contribution. You know, it would have been a drag on the gross margins because it was basically a flip. We bought the airplane and within a day we sold it and made a nice spread. But from a gross margin standpoint, it would have been below our standards. From an operating standard margin standpoint, it would have been above. So it was again a double-digit operating margin transaction.

Okay. And for the year you did $11 million in I guess sort of the JV income and I guess below the line there. Is that about what we should expect that number to continue to grow just given the overall size of the portfolio particularly what has gone on here in the first quarter?

Absolutely. I think you should see some meaningful growth coming out of that business. Again, I think we have a great position. There is a lot of action going on in the world markets. I think having visibility in the Asian market through our Aviation Supply Chain group and our positioning in Shanghai and Malaysia and Singapore and Tokyo, etc., I think is giving us a deal flow that we are able to respond to and take advantage of the market dynamics and our experience in this area. And we anticipate that this will continue to be a meaningful contributor to our overall results.

Okay. And just one final, Rick, was there any contribution, any meaningful from Reebaire this quarter and from a sales perspective?

Sales line, they were right around $3 million.

$3 million. Okay. Thanks a lot.

Eric Hugel, Stephens Inc.

Can you hear me?

We can hear you.

Great. Just in terms of the new Southwest line that you got at Indianapolis, is that incremental to the bay count where you are at now? So is that new, additional or is that replacing something else?

That is new and additional. You know Eric, as you know, you do have some lines coming in and going out but it is an additional line for -- from Southwest. It will come in later this month and then we are expecting another line from another customer to come in in the fall.

So we should be expecting then because you are at seven now, you are telling me by the fall you should be at nine bays utilized?

Eight or nine.

Eight or nine. Okay.

But again, Eric, I will just say it one more time; our focus really is on improving the profitability of Indianapolis.

Oh, I fully understand that and that sort of goes to my next question because I know you have been very focused on that and you have said repeatedly that we could fill up this facility tomorrow but we wouldn't be able to execute it very well. And I am just sort of trying to read between the lines here and sort of is it safe to say that you -- Southwest giving you another line of maintenance. And you accepting and taking that business is sort of a testament to you are climbing up that learning curve and you are doing well and you feel much more comfortable today that your margin improvement goals are much more readily achievable today than they were let's say three months ago?

Yes, so Eric we feel good about the progress we are making particularly on the customer front and on the performance front and we are confident that we're going to be able to get there on the margin and profitability front. Just keep in mind that we have basically less than $1 million invested in this business from a kind of a fixed asset perspective and we have about $10 million of working capital invested.

So it has tremendous potential for us and we are spending a lot of time and energy trying to get it right. We think we have it right from a lot of different perspectives and we have some more work to do here on the margin side. But we are going to get there.

Okay. Where do we stand with the whole Goldsboro move of the cargo loading system business? Is that pretty much behind us or where are we?

It is pretty much behind us. It is pretty much behind us. We are you know as I said earlier in response to one of the other questions, we are doing more and more shelter manufacturing down there to take on some of the new business that we have been winning there. But the cargo systems is pretty much behind us.

Okay so that is done. Can you address -- I guess one of the things that you don't have here and I'd sort of love to have -- the free cash flow. And can you sort of talk to us? I know one of the things that we have talked about previously is that you are going to be focusing on that going forward. Can you talk to us -- sort of how should we think about how should we benchmark that? And I understand there are things like buying aircraft and all that fun stuff that sort of comes into the mix. But sort of ex that, you know, how should we think about conversion of net income into free cash flow?

Well, Eric, I mean, let's start with the easy part. The CapEx that will go into your free cash flow as I think we have talked to you in the past, we had about $30 million of CapEx in '07 and we will expect that to decrease in '08. So right now we think we will be more around $25 million-ish of CapEx.

In terms of operating cash flow, as you know, we are investing in the business significantly. We talked about it in the release and you hear about it in some of the other commentary going on around it. So all of those investments show up in the operating cash flow as you will see it when we filed our K. We are projecting that we are going to do better on our working capital requirements but we will continue to invest in the business. So I am not sure we are ready to give you full-year guidance on cashflow for '08 right now.

But it should be -- would you expect to be generating positive free cash flow?

I would expect positive free cash flow with the caveat that as we see opportunities to continue to invest in the business, we see lots of growth in front of us as we invest in the business, we will make those investments.

And I guess my final sort of question here with regards to the sort of expansion, significant expansion of the aircraft leasing business. I mean I understand it is sort of you get good returns on all the stuff but it is significantly increases sort of -- I guess the volatility and variability of earnings and your ability to project earnings. And can you sort of just give us sort of why -- was the investment the price that you got so compelling like sort of another Indianapolis that you sort of just couldn't pass it up and sort of offset sort of that increased volatility and unpredictability of the business?

Eric, this is David. You know the way I view it is that by increasing the size of the portfolio, we are reducing the volatility and making it a little bit more predictable giving us a broader base in which to manage the not just obviously the income from the leasing but also the select assets on a more timing -- you know being able to time let's say the sale of that to give us a more predictable income stream.

So you know, yes, we believe we have made a very -- a couple of very good investments here. One in particular where although we have indicated 21 aircraft, we are buying 18 from one source and we believe we have bought those aircraft very advantageously and we think we will get an acceptable above target return if you will on those assets. So I think you can look at this business as you know that we stepped up a little bit here. And we stepped it up because we are in the right place at the right time and I think we will as a result of this decrease the volatility.

Now maybe if this increases the predictability, I mean I understand you haven't closed on these aircraft yet but sort of when we built the model and all that stuff I mean the equity earnings is just completely a plug there is no way to sort of --. I mean is there -- we have been using about $3 million a quarter. That is about where you have been tracking. With this new sort of fleet coming in, is there any way that you can sort of help us in terms of building our models and sort of coming up with that sort of plug? And what does that mean, that new fleet mean to this sort of number?

Okay. So obviously let's have the dust settle a little bit here but at the same token I believe that you should expect improving and increasing earnings coming out of that segment of our business.

Is this sort of doubling the size of this fleet maybe we just sort of at $3 million becomes 5 to $6 million or is it sort of less than that?

Let's let the dust settle a little bit but I think directionally you are heading -- you are going in the right direction.

All right, great. And just one comment. It would be very helpful if you guys in the future put the either the gross margin percentages on a segment basis in the press release. Or if you wanted to start disclosing operating margin per segment that would be very helpful. Thanks a lot, guys.

Thank you.

Jon Braatz, Kansas City Capital.

Good morning, gentlemen. Going back to the leasing business, you have expanded it significantly here in this quarter. My question I guess, David, would be would you think of maybe even expanding it further? Are there additional opportunities out there, favorable opportunities to even go further in this direction?

Let me say that we are maintaining a very solid discipline around this business. For the most part, the larger transactions we are doing in joint venture, with joint venture structures, with also very disciplined partners. So you know I view that the visibility that this Company has as a result of all the other activity we have performed is unique and I think it gives us a leg up let's say on some of the other folks who are kind of playing in this market.

I think having the capital availability that we have through us either through our own capital resources or through some of our partners resources, I think would signal that we should expect you know continue to stake out our position in this market and continue to see some favorable activity in this market.

Okay. Can you give us what a typical term on a lease might be? How many years?

So the typical term on a lease that we are buying is let's say between three and seven years. And it is unusual for us to go to lease term, to hold the assets through a lease term.

Right. Okay, okay. The other thing is I saw yesterday where a gentleman by the name of John Graber left AAR and went to AB Air or something like that. And was he in charge of the Indianapolis facility? And I guess my question is with his departure, does that change anything in terms of your plans and your opportunities at Indianapolis?

John is a great guy. We brought John in from -- he had an airline experience. We brought him in from ATA in Indianapolis, an Indianapolis-based individual. He joined the Company with broader responsibilities or different responsibilities I should say more of a staff function. We put him in to the business there in Indianapolis. I think he did a nice job. I think he is a quality individual, a good guy. He moved on back into the airline business which I think was more suited for his career aspirations.

And we have replaced him with a veteran here at AAR, our Vice President of Engineering, Mickey Cohen, a 35-year veteran of being in the aviation maintenance business. A good solid guy and so I think the momentum continues. Mickey has great credibility with the likes of Southwest for instance. And onto Mickey's guidance here, we have been able to turn -- for instance we are performing winglet installations for Southwest. They have numerous providers of this winglet installation. They are in the last few that we have performed for them, we have performed at a faster clip than other people have.

Was John the manager in Indianapolis?

Yes, John had for a short period of time, John had been the General Manager.

Okay, okay. Then the last question is in the supply chain area, I think it has been awhile since we have seen another -- seen a deal like Mesa and so on and so forth. Is that a reflection on maybe things changing in the industry or just things not happening or pricing or whatever? Are those opportunities still there whether they be domestically or internationally?

Yes, no, we see flow and I had a blank here in terms of the name but we signed Chautauqua up this year, although it is not the same size as Mesa, it is still a meaningful contract for the Company. We continue to look at programs of that nature. The deal flow is still pretty good. I don't want to signal anymore beyond that at this stage but as I indicated earlier, we expect sales growth to continue in the mid double-digit range for that segment of our business. And obviously to achieve that level, we are going to have to attract additional program activity.

So yes, I think there is flow. I think the Company is performing in the programs that we currently have and we would all be disappointed if we didn't sign some additional business here this fiscal year.

Okay. Thank you very much.

Yes.

Greg Macosko, Lord, Abbett.

Yes, hi David. I guess I don't have to ask any questions about the sales and leasing. But I may ask one anyway. With regard to the fleet, you said 40 plus. How many of those are joint venture and versus your own?

Roughly for our own account, you are in the 10 range give or take one or two but basically most of the aircraft are in joint ventures.

So about three-quarters are in the joint venture and one-quarter that you have of 100% yourself?

Right, correct.

And you expect to keep that same ratio?

I think that ratio of owned is probably a little higher than we would expect but we have had some interesting situations that we have been able to take advantage of. And you know but I think as we project out further, Greg, and we look at growth opportunities, it will probably be at a higher percentage through joint ventures.

Okay. And then with regard to the cargo operations in the Carolinas of that shift that was made, was there any inventory in the system and is that all gone? Or just talk about that a little bit.

No, there is no -- there was no real duplication of inventory or any kind off ramp up, Greg.

And that is at kind of expected production at this point and we are kind of through that hump as it were?

No, I think we're at the last stages. I wouldn't say that we are completely finished but we are at the last stages.

And then with regard to Indianapolis, I know that there is a number of different locations that you can take on in the facility, some that were not leased and that you can lease up. How many remain unleased by you and that could be leased at this point?

Yes, so there is there are 10 hangers altogether that we have contractual access to. And as we talked about earlier, currently we are using seven of those 10. So we can turn on three at our discretion. There is -- I am not sure if your question asked about -- there are two other hangers that are physically attached to the building that are not under our lease agreement. I'm not sure if that is what you are asking but those are out there. They are not anything we have asked about but that is the full picture of Indy.

And at this point, so you have seven of the 10 and I would assume or could I assume that longer term you expect to take all those 10 as you get additional carriers interested in signing up?

Sure. That would be our goal but not to repeat myself but our first focus is on improving the profitability.

Would you expect that to get to our goal of 12.5% operating margin, we would want those -- have all those 10 in the operation?

No, I mean I think there is lots of things we can do on margins at Indianapolis without growing sales from this point.

Okay.

But I think ideally we will be running at or near capacity and generating acceptable growth margins.

Okay, thank you and congratulations, Tim.

Scott Blumenthal, Emerald Investments.

Good morning, gentlemen. Congratulations.

Thank you.

Thank you.

To follow up on what Eric and John were in that vein with the leasing, can you talk about the percentage of the leasing income that is now kind of variable or activity based? And what you expect to get from kind of the engine leasing as opposed to aircraft leasing from here going forward?

Okay, well the activity that we report there in the Aircraft Sales and Leasing is purely aircraft activity and is not reflecting engine activity. We do have engine activity of this nature as part of our supply chain business and we don't break that out. But it is on the aircraft business, that is all aircraft related.

Okay. Is there any variable or activity-based aircraft leasing because those numbers, like Eric mentioned, tend to jump around a little bit? And you mentioned that you disposed of or sold one aircraft in the previous quarter so that wouldn't seem to move the numbers around as much as they have shown from $3 million in Q3 to $1.1 million in this current quarter.

Well the way I would look at it is that if you look at the operating income contribution from this business, it is up $1.8 million on a year-over-year basis in the fourth quarter and $8.6 million in the year. So we would anticipate that we will continue to get acceptable growth rates out of this segment of our business. And as I indicated earlier, as we increase the size of the portfolio, we think there will be less volatility and more predictability on the income coming out of this business.

Okay. That's really helpful. So then can you maybe help me as far as the types of things that could cause that to move throughout the quarter from one quarter to the next?

Well, the things that could cause it to move might be opportunistic in nature. So if there were a situation that we seized upon opportunistically that we couldn't forecast, you know that might be something that would be something that would be favorable. I am not sure how else to answer that question.

I mean it will change based on the size of the portfolio so as the portfolio grows, you should see a larger pickup from just the lease rental income. And then it also changes if transactions, as David says, are opportunistically if we exit one of the transactions we are already in.

Okay. That helps a bit. And should we expect the advisory service and MRO businesses to benefit from basically what looks like a doubling of the fleet size and the leasing business?

Clearly the MRO business over time will benefit. At this moment in time we are pretty well filled up in our maintenance space bases with a business that we currently have from third-party customers such as United and Southwest and we have opportunities to expand our business with those customers and that is where our focus on the maintenance side is coming. However, from time to time there is opportunity to supply spare parts and perform light maintenance work on owned aircraft, correct.

Okay. And my last question, I think everybody has hit just about everything else. Could you comment as to how important you felt Brown was, the acquisition of Brown was in securing the recent order that you reported this morning from the Army?

Pretty much unrelated. The order we received today was a business that we have received through our mobility business. Of course of Brown is part of our mobility business but this particular contract was unrelated to Brown. But we are counting on some very exciting things to come from the Brown acquisition. Clearly they bring us a leg on our stool that we didn't have before and we are very excited about what we are seeing so far in the first two months of having that business under our umbrella.

I guess the Army at this point is not using a lot of electronics and tool maintenance operations, huh?

No, they are. I think so. Yes. It's good. And the Army -- keep in mind now, the Army is a relatively new customer base for the Company. When I say new, if you looked at coming into this decade we did very little business with the Army but we have built some good products to support the Army. And yes, we are excited about supporting the Army.

Okay, very good. Thank you.

Chip Cruse, Greenville Capital.

Hello. Okay probably the next guy.

Stan Manne, Manne Family Investments.

Good morning gentlemen. Good job. I have four questions. One on D&A depreciation and amortization in 2007. Can you give me that number?

Sure. Our fourth quarter D&A was $8.1 million.

What is the year?

$32.2 million.

Okay. Do you think it will stay up there for next year? For modeling?

Yes, generally speaking our asset base has not shrunk at all. So yes, I would imagine it would.

Net debt for '07 ending? I am looking to get an EBITDA just so you know EBITDA.

Our net debt?

Yes.

Well, so cash balance was $83.3 million.

Right.

And bear with us. And so as we disclosed in the press release, you have recourse debt of 284.2, non-recourse debt of 43.6.

Is that convertible, the 43.6?

No, no that's not. That is related to aircraft transactions. The convertible debt we have would be in the 284.2 million.

And the question of three is, does leasing, your increased leasing, have a positive effect on reducing our tax rate going forward?

It has a positive effect on the cash taxes that we pay. It doesn't really have an effect on the effective tax rate for -- that you would see on the P&L.

So we should kind of use the same tax going forward in modeling?

Yes as we talked about last quarter, we think -- our effective tax rate obviously went up in '07 and we think '08 we should expect it to be in the sort of around where you saw fourth quarter, maybe slightly higher.

Okay. And last question, would you consider using any of this cash for a stock buyback at all? Have you thought about that?

Yes, well we have authorization and from time to time we explore that and at this moment, it is something that we always consider.

Authorization for how many shares or dollar buyback? You say you have authorization.

Yes.

What type of dollars?

1.5 million shares I believe.

1.5. Okay. Thank you. Great job, guys. Thank you.

Eric Hugel, Stephens Inc.

Can you talk a little about the tactical shelter award, that $31 million? I mean that is a big slug of business relative to the size of the Structures and Systems business. And it says it delivers over the next 12 to 18 months. Can you sort of give us some inclination as to sort of how -- because that could drive significant growth, I mean, but is that going to really start to hit towards the end of the year or into fiscal '09? Or is that sort of going to start to ramp up as we go through the various quarters of this year?

No, we will start producing these in the next 90 to 120 days, Eric. It is a great piece of business. We think that there is more to come. The demand for this type of product has been strong, and we feel good about it. We also are very pleased with the fact that we have got some capacity in the system to go ahead and produce these things, satisfy the customers and grow our business.

If you could remind me, the tactical shelter business is higher margin; it is sort of better than average margin, correct, for this segment?

I would say that the margins are about normal.

Okay. Can you talk about -- I guess the C-27J was recently -- I guess it is in protest right now, but it was recently awarded to JCA, and I know you are the cargo system provider on that. Can you talk about if that sort of -- if that protest, if the award is upheld, can you sort of talk about that, what the opportunity is there? I know near term, it is probably small, but sort of longer term I guess maybe relative to the A-400M. I mean it looks like from the numbers you have thrown out there, A-400M is somewhere in the ballpark of maybe $1.5 million an aircraft. Is this a half of that, a third of that? I understand it's a much smaller aircraft.

Yes, it's much, much smaller, much, much smaller. But nonetheless, it is an opportunity that we hope and expect to win and are excited about.

Can you talk about the process there? I mean you are the sole source on that aircraft. I mean, would you get an order from Alenia or from L3? I mean if they build the aircraft, you are on it, or do you have to be selected.

Well, our system has been selected and we expect that our system would be the system that goes into the airplane. And Alenia is our customer.

Okay. Can you talk about the $150 million contingent convert? We are getting pretty close to the point here where that is going to start -- I guess the strike is 29 and change; the convert is another 20% on top of that, so 35 and change. You know, what would be your plans with regards to that? Would it be once it hits that price that it could convert, would you sort of go to the holders and sort of look to buy those bonds out?

Probably not. Probably not.

Okay.

You know, the interest rate is 1.75%. The holders are going to want, you know, a premium. It is a good piece of paper for us. It is a good piece of paper for them.

Sure. I guess finally, getting back to the Structures and Systems business, one, the Brown acquisition, that $12 million in revenues was a bit stronger than I had expected. Sort of what should we be thinking about from an annualized sort of going forward into '08, what kind of annualized run rate does that business have? I mean $12 million for two months of the quarter, I mean is that sort of a good run rate? And given Brown and given this new shelter award, should we expect to see sequential ramp-up quarter by quarter in the Structures and Systems business, given the pilots and given all this new business that you seem to be winning?

So, Eric, let me just stay on Brown that we are very pleased with what we are seeing there in terms of prospects, in terms of opportunities, in terms of upside, okay, without getting into you know the rest of that on Brown. In terms of our Structures and Systems segment, yes, we are looking for continued growth there. There is demand, we have capacity, and our products are very, very well-received. So yes, we are looking for continued growth.

But I mean is that $12 million that you did this quarter a pretty -- that is a pretty sizable number if we just use that as a run rate. I would hate to put that in as a run rate and that be completely wrong. Is that a good sort of place to start?

Eric, we are not expecting the sales growth, the sales rate, that this business has contributed in the first two months. I think, again, this is early in the process. We believe that we have a good business to work with here. It complements the other things that we do. I don't think I would go ahead, though, and extrapolate two months into a full year's results. So I think it has got good trends. It is a good business. You know, I would leave it at that.

Because I mean, I guess I was under the thought that this whole business was like maybe a $25 million revenue business for -- on an annual basis. So $12 million just well out of whack from what I was expecting.

Well, we are expecting more than $25 million.

Yes, our expectations were higher than that, Eric, but as David said, what we saw for the two months was higher than we had anticipated.

And just to be clear on the tax rate, I guess we were using 35%. It sounds like you are looking more like 33%, 34%?

Yes, so we rounded to about 33% for the quarter, and I am saying we will probably be a little bit up from that. So 34% to 35% is probably the right way to model it.

Okay. Thanks a lot, guys.

Arnold Ursaner, CJS Securities.

Hi. Can you give us a breakdown of international as a percent of revenues for the Company and what sort of growth rate you had in '07? And given some of the new programs you have, what do you think it could be in '08?

So in '07, 18% of the sales were from Europe, 6% were from Asia and 73% were from North America, and the balance was other.

Got it.

In terms of growth rate and in terms of expectations, I think we are expecting our international sales to grow. There is more and more aircraft moving into the Asian market. There are a lot of opportunities for the Company outside of North America. So I think what we are looking for is over the next year, two years, three years, an acceleration in our growth rate in both Europe and in Asia.

Again, you have had quite a few questions, but one more if I could. You typically make significant investments when you take on a new MRO contract. Can you give us a feel or attempt to quantify the cost of those investments in '07, and what do you see sitting here today with what is in hand for a trend looking towards '08?

Arnie, I think most of the investments that you're talking about that we have experienced today have really been more learning-curve type expenses in the training if, in fact, it is a new aircraft. And as we move on and as the business in Indianapolis which I think you are referring to matures, I think there is less and less of that kind of impact. But as I said, it is still a relatively new plant for us. We don't have those kinds of impact, at least not as significantly, at our other MRO shop in Oklahoma. So I think over time, the impact of starting up new customers will be less and less noticeable.

I guess where I am going with this is given you did essentially a 10% operating margin for this year and did incur some unusual expenses, it seems as though -- and I know it is not specific financial guidance -- but a 10% view for the upcoming year seems to be conservative given some of these bigger trends.

Well, we need to get that number higher so that we can hit our consolidated corporate goal.

Okay. Thank you very much.

Peter Arment, JSA Research.

I will be quick here. You already answered the tax rate question. Tim, just quickly, the aircraft sales and leasing group in terms of the revenue contribution this year was just under $42 million or right around there. And I can remember when this business hit $150 million plus back in the late '90s, but this was without having a lot of your aircraft through a JV. How should we think about a revenue contribution for '08 from that business? It's hard to model.

Right, right. So as more and more of our aircraft are held in these joint ventures, there will be less and less activity run through the revenue line. But from time to time, as David commented, you will see aircraft that are purchased for our own account and those of course if those are sold they go through the sales line. But as the portfolio gets larger, most of the aircraft will be run through joint venture accounts through joint ventures.

Okay. So you have nine or roughly nine aircraft in your own account right now?

Right.

And you entered '07 with what? Roughly six or so?

I think it was six.

Okay. So we could assume that there might be additional aircraft sold this year through the consolidated line.

Yes, there will be. And that transaction that David referred to which was basically a flip, you know those are opportunistic. There is some volatility there but they are good transactions and we make money on them.

Yes, and David, you have given us a lot of color before on just the leasing market in general. Lease rates still very firm, the opportunities continue to be quite plentiful. Is that the way it still contrasts?

Yes, I would say that it is a good market. I would say it's a good market. And just if I may just give you just a little more color on the sales line. Even though, first of all the business itself what we are saying here is that we have made a significant step up if you will in this business in terms of our involvement.

And so I think you should probably expect increases in owned assets as well as in JV assets even though percentile-ly I think you will start seeing more in the joint venture side just by virtue of having -- going from six to nine for instance would indicate that you are going to see some sales activity in that business as well. That aspect is a little less predictable than the overall contribution from our Aircraft Sales and Leasing business.

Okay.

Hopefully that is clear.

No, that clarifies it. Thanks, David.

Eric Hugel, Stephens Inc.

One more question. Getting back to this 10% operating margin target. If I recall this is now the third year in a row that you have set a 10-year operating margin goal for the year. You were supposed to hit 10% operating margins in the fourth quarter and I understand sort of what is going on. But just given that the fact that you are significantly going to be adding now to the JV line which doesn't have any revenue which should significantly improve your margins just right there off the bat, and given sort of that 10% target number, is there something else in some of the other segments that is coming down that we are not be getting margin expansion for? Can you just clarify that?

Eric, I think what we are saying is that -- and you are correct -- we set a target to be at 10% by this quarter. And that was back when we were in the 7% and 8% range. And if you take a look at operating margins on a year-over-year basis, we have made meaningful progress by finishing the year off at 9.2 -- is that correct, 9.2%? I'm sorry 9% for the year. And we have got kind of indicated why we didn't hit the 10%. But yet as we look short term, we are looking at 10% and I think what we are also indicating is that in our planning cycle, we are looking to be at 12.5%.

Now we didn't expect, quite frankly we didn't expect the sales growth to be at 22%. We thought the sales growth would be a little bit less. So we are I think we are very pleased with the sales growth that we have achieved. Some of that growth has come through the acquisition that you mentioned and that acquisition did not have the margin contribution that we were expecting. It had the gross margin contribution; it didn't have the margin percentage contribution as a result of higher sales than we had forecasted.

But I think if you look at the trend line, the trend line of the Company has made some meaningful progress in margins. We came into the fiscal year with margins of 7.4% and we ended the fiscal year with margins of 9%. So I think most people would be pretty satisfied with that kind of improvement as we are. Yes we had a target of 10% for the fourth quarter. We came in at 9.2%, so it is a little bit short. We tried to explain that. We saw 10% as kind of our short-term goal and we have established -- we have put out there last quarter at least -- we put out there a goal of 12.5% in this current three-year planning cycle.

So we are kind of sticking to that. I think we are doing some good things around the Company and the operating margins are important to us and we are going to work our butts off to achieve those numbers.

All right. Thanks a lot.

Stuart Goodman. Stuart Goodman, your line is open. Please check your mute button.

There is no question there.

Okay. (OPERATOR INSTRUCTIONS). Eric Pessagno, Diamondback Capital.

Yes, good morning. I just wanted to ask on lease rates I may have missed earlier I joined the call late -- but could you comment on lease rates year over year and your expectations for the rest of the year?

Lease rates are good and we expect lease rates to continue to stay good.

Okay. And is that across all aircraft types?

Yes, I mean, from time to time you might buy an aircraft with a stub lease on it where the lease rate is not where you want it to be but that is the opportunity for the Company. But for -- on a general statement, lease rates are good.

And lease terms I guess you guys are not holding lease term but in general leases that you are picking up, are they -- the terms expanding or staying steady?

Typically three- to seven-year leases and you know you might in the same month buy one with a seven-year lease and you might buy one with a three-year lease. So there is no golden rule in that regard.

Okay. Thank you.

Thank you.

There are no further questions in the queue at this time. I would like to turn the program back to you.

Great. Thanks for your participation. Hopefully we were able to help you understand the Company and our performance and the excitement that we have here at AAR.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.