AAR Corp (AIR) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the AAR Corp. first quarter, fiscal 2008, earnings conference call. At this time, all participants in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to our host, Mr. John Bowman, Director of Investor Relations. Sir, you may begin.

Thank you. Good morning, ladies and gentlemen. 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 the factors discussed under item 1A, entitled risk factors, included in company's May 31, 2007 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.

Good morning and thank you, John. Good morning, everyone. Joining me today is Tim Romenesko, our President and Chief Operating Officer and Rick Poulton, our Chief Financial Officer.

As you saw this morning, fiscal 2008 got off to a strong start, with a 27% increase in sales for the first quarter, and double digit sales growth in all four of our operating segments. The majority of the sales growth was achieved organically, with organic growth contributing approximately 20 percentage points, of the 27% sales increase.

Aviation Supply Chain, by far our largest segment, representing 47% of consolidated sales, and 57% of consolidated gross profit for the quarter, continued to deliver strong results, with meaningful growth in both sales and margin. We're benefiting from our industry-wide leadership position in this segment, and expect continued strong performance, as we see opportunities with both commercial and defense customers. The solutions we're developing in our MRO segment have been well-received by the market, as evidenced by the launch of an additional heavy maintenance line for Southwest Airlines in July. Our landing gear business also continues to be very strong. We are doing very well servicing our customer base, and our airframe maintenance facilities, as we're delivering quality aircraft, and have done a very good job expanding our customer base.

During the quarter, however, margins in the MRO segment were under pressure. We worked some very difficult aircraft for one customer, and we're also in the process of making contract changes with another customer. Further, we continue to experience some integration challenges with our Reebaire acquisition, more so than we anticipated, but still believe we made a value acquisition, important market for the company, the regional airframe maintenance.

Performance at our MRO facilities continues to be an area of focus, and we expect steady improvement as we implement our margin improvement initiatives. I know you've heard more of this from me in the past, but I want you to know, keep things in perspective, as it relates to Indianapolis. We commenced operations in January '05. We have less than $5 million invested in the business. We're getting a return on our investment. You can see we're getting some very good sales throughput, and we have a couple of issues we need to address, which we are, and we believe we should start seeing margin improvement coming out of that business very shortly, and getting us to a point, where our return on investment should be exceptional.

During the quarter, we also had a leadership addition at our MRO facility in Oklahoma City. Don Wetekam will now lead that operation. Don is a decorated three star general, who previously served as a Deputy Chief of Staff for Installations and Logistics with the U.S. Air Force. Don has had extensive experience with MRO operations, and was a big proponent of commercial process improvement techniques within the military, such as lean and six sigma. Don will be a real asset as we look to improve the profitability of our MRO operations.

Our Structures and Systems segment experienced strong growth in the quarter. Demand for mobility products remains robust, and the acquisition of Brown International also contributed to the year over year growth. New contracts announced validate the Department of Defense's continued confidence in AAR to provide high quality solutions and products supporting their activities around the world.

In August, Terry Stinson joined AAR to head up our Structures and Systems segment. Terry is an aviation industry veteran with outstanding credentials. He previously served as Chairman and CEO of Bell Helicopter Textron Inc., and as President and CEO of Hamilton Standard, a division of UTC. Terry has now had a chance to visit each of our Structures and Systems operations, and is working closely with our local leaders, to continue to grow these businesses profitably.

We're very pleased with the results of our Aircraft Sales and Leasing segment. This segment was a significant contributor to the quarter, driven by the sale of two aircraft, as well as earnings from joint ventures. We have been in the Aircraft Sales and Leasing business for over 20 years now, and the quantity and quality of deal flow is as strong as it has ever been, during this period. We have a great team in place to drive continued success in this business.

During the first quarter, we essentially doubled our aircraft fleet by acquiring 18 737-400 aircraft, and one 747-400 aircraft, with joint venture partners. We look forward to continued growth from this segment. Now, when you're looking at our numbers, some of the aircraft transactions take place above the line, and some of those aircraft transactions take place through the joint venture line, and you can speak with Rick Poulton later today to get more clarification as to how we're looking at that business, and in fact, in the period that just ended, this business contributed $3.5 million more of income, this year, than it did last year.

SG&A costs increased in the first quarter as the company stepped up spending to fuel additional growth, and fund operational improvement initiatives across the organization. SG&A related to companies acquired during fiscal 2007 also contributed approximately $900,000 of the increase, from a year ago. We believe approximately $1 million of the SG&A expenses incurred in the first quarter, will not recur in the second quarter. Now, if you watch the company, you see the company's performance, over say, the last three year period, you'll note that we've done a very good job on SG&A. SG&A got a little higher this quarter than we had anticipated. We have our arms around it. We understand where it is, and we're taking actions to bring it under control, so we should expect even better results than SG&A's 10% of total sales. We're expecting that to even improve, as we go forward.

Earlier this month, we announced we had amended our senior, unsecured credit agreement, increasing the credit facility from $140 million to $250 million. This provides the company with a greater degree of flexibility and cash availability to pursue growth opportunities. We continue to see excellent prospects in the markets we serve, and we want to be in a position to move quickly, if the right opportunities do, in fact, develop.

In summary, our first quarter results represent a solid start to fiscal 2008. The management team and organization as a whole, continues to be focused on growth, margin and profit improvement, new business wins, and solid execution. Thank you all for joining our call today, and I would like to open up the line now for any questions you may have.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question comes from Eric Hugel from Stephens Inc. Your line is open.

Good morning, guys.

Good morning.

Tim, I was hoping maybe you could sort of -- I guess you guys talked about improving the margins, and your margin improvement plan at Indianapolis. I was hoping that maybe you could give us some benchmarks, and maybe sort of on a scale of one to ten, in terms of how efficiently that facility is operating right now. Maybe like a 1 being, went back in January when Southwest just started in and you were bringing everything on-line. And 10 being, sort of a well-oiled machine. Everything running smoothly. Where are we right now? Just in terms of that process?

We're less than 5, ok. But we're -- but we're getting better at a very quick pace here. Particularly at Indianapolis. We've got the customers,they like what we're doing. We're delivering quality, good, quality aircraft on time. That was our first. If you remember, that was our first challenge, to go ahead and get customer acceptance. We have that. We have -- the place is busy. We've been able to go ahead and build up a good work force. We have an excellent leadership team in place. We've got some stability there.

Now, it is a matter of improving the profitability. And we're doing that by going ahead and implementing some lean initiatives across the operation. We're looking at some of the contracts that we have and making some changes that are going to go ahead and make a difference for us near term. And we're starting to see the results. Our month of August results were actually pretty strong. Both from a top line, and from a margin perspective.

So, you know, we're encouraged by what we're seeing. We think that the improvements are real and sustainable. And we think we're very, very, close here to turning the corner. As David said, we have a very low capital base here. If we can go ahead and get the margin where we want it, we'll have a phenomenal return on capital. So, we're below 5 and you know, we're headed to 10.

When you say below 5, is that below 5 but close to 5? Is that sort of how to think about it?

That's a 4. How about 4.

I guess why I say that is because I want you to compare it to I guess where we were -- where we ended last quarter.

We're night and day better than where we were.

So, you've gone from let's say a 1 -- let's say the fourth quarter, to about a 4 this quarter, you would say?

I don't know the exact.

I'm just trying to sort of get a benchmark.

The pace has accelerated, okay. The pace of our progress has accelerated.

Okay. And I guess, in terms of your margin initiative, you're saying near term, seeing some significant margin improvement, I mean I know we've talked about the plan there is, to get on an operating margin basis up to, let's say high single digits, by let's say the end of this year. Is that -- I mean I understand that there are some issues with, if you bring in a new customer, and you know, all of this stuff. Is that still a realistic plan?

Yes.

Okay.

We need a few things to happen, you know. There's parts of the business outside of the heavy maintenance that go ahead and can help contribute to the margin. Those have to develop for us. But it certainly is our plan.

Okay. Can you address maybe-- maybe it is a little sensitive here, but you know, what kind of contract changes, I mean, are you talking about, in terms of what is it just sort of penalizing a customer for not bringing in a plane when they say they're not going to bring in a plane?

No, it is about trying to get paid for more of the hours that we're expending on the aircraft.

Okay. Okay. And --

Trying to recover more hours.

Okay. And with regards to the component repair business, I guess the other business that, you know, there's some margin opportunity in, can you talk about where we are in terms of-- I guess some older, not very profitable contracts, sort of rolling off and being replacing that, with sort of newer contracts?

That's happening. That's happening.

Is that more back-end loaded, or front loaded-- sort of how should we think about that, how that progresses over the year, because obviously, that should drive some expansion to Aviation Supply Chain.

I think that the pace of progress there is perhaps a little slower than the curve around at Indianapolis, but it is an area of extreme focus, in these shops, and we've got people in there that are driving the business, to get better results, better operating margins, better return on capital, those types of things.

Is there any way to sort of-- what we sort of just did with Indy, on an efficiency level, or where you want to get to, sort of give us a-- sort of a scale that we can sort of think about going forward?

It is probably similar.

So, going from like maybe a one to a four or something like that?

You're changing the scale on me.

Going from a 1 last quarter to this most recent quarter like a 4 or a 3.

Let's say we're at a 4 now and by the end of the year, by the end of the year, we should be a lot closer to our 10 but maybe not all the way there.

So, you're still encouraged that, by the end of this year, a lot of these issues that you're sort of working through now, can be resolved.

We are.

Okay. Thanks a lot, guys. I'll let other people ask questions and I'll come back.

Thank you, sir. Our next question comes from Peter Arment, from AmTech. Your line is open.

Good morning, guys. Can you give us a little more color on, you mentioned the aircraft at Indianapolis that were challenging, and also contract changes. Do we look at those as one in the same?

No. Not really.

Okay.

Two separate situations. But they weren't necessarily both at Indianapolis.

They weren't. Okay.

The contract negotiation is with a customer in Indianapolis and the aircraft that were, let's call it challenging, to redeliver, were in our Oklahoma facility.

Were in Oklahoma.

Yes.

Okay. And can you give us a little more color on Reebaire because it was not a large acquisition?

Small acquisition, Peter. We were expecting the business to-- we were expecting by this point in time that we would have much-- a better margin environment in that business. But in reality, we had to put some disciplines into places we thought, that we kind of were surprised about, let's say. And when we did a much more thorough review post-acquisition, we recognized we had to beef up some of the quality control and operating procedures, and we're really just in the midst of doing that at this moment.

When do you expect that to be completed?

I think it is an ongoing process. We'll start getting back the margins we're expecting in the fourth quarter. But this is a relatively small acquisition.

Right.

Small numbers. Not really that -- it is not a moving the needle kind of thing, but nevertheless, it is something we're paying attention to. You know, we still feel good about the regional airline space. It is an important part of our Supply Chain business, and should become an increasingly important part of our MRO universe. So, yes, we've got good people there, looking at the right things.

Yes. David, could you just talk a little bit about your aircraft portfolio? You made a big investment this quarter, again, following on last quarter's investment. And just the environment out there, with generally perceived tightening credit, and how that plays into AAR's role.

So, of course, a worldwide business for the company. The large acquisition we referred to, was coming out of the Asian theatre. The demand for aircraft still feels relatively robust. I think the investments we made are prudent. Leases are in place for a-- in the case of the large buy, three to five years. In the case of the 747, the lease is into the middle teens. You know, I think we're making good value buys. And yes, I think the market is as robust as I've seen. If you look at the quarter's results, the quarter's results were very strong and we anticipate that environment will continue. The list requirement is still out there. As you see, the OEs of course are -- they have a huge order book. Backlogs and order books are maybe struggling a little bit with some of the newer technology stuff. But you know, the demand for-- these are all stage three aircraft we're acquiring, and in the case of the Malaysian aircraft, they're middle 90's aircraft. These aircraft have, in our view at least, another life or two ahead of them. So, yes, we feel good about that business.

We feel we're in a good position. We continue to do these deals on a leveraged basis, with the debt on a non-recourse basis. We continue to attract partners. To share the burden, but of course to share the opportunity. We received fees from our partners for managing the assets. But I think we're in a good position.

It is a little confusing. I recognize it is a little confusing, how we-- you know, account for the activity because some of the activity are assets that we have on our own account, and some of the assets are in joint ventures. Most of the assets are in joint ventures, however in the period we just ended, we acquired a couple of assets and flipped them in the same time period, and those came through our, you know wholly-owned, above the line, portfolio.

So, yes, to answer your question, the business feels robust, feels strong. Like I said, it is international in scope. Although there might be potential credit tightening here in North America, elsewhere, we're not seeing that. We're seeing demand for lift.

Okay. And just regarding a critical mass of the portfolio. You feel, is there still further room to go, or do you feel you've got it up to a size now where you're comfortable?

As long as we keep flipping the assets, and as long as we keep moving the assets through, I feel comfortable expanding the fleet. If the time comes when it gets a little tougher to go ahead and move assets out, then I think we'll slow down. Hopefully we'll be able to anticipate that, but right now, the markets feel good, and I think we're selectively looking to increase the fleet. We didn't necessarily expect the fleet to be at this size, at this point in time. We took advantage of what we think is a wonderful opportunity. We're in essence controlling $187 million of assets, with an $18 million investment, making a fairly good return, with some pretty good upside. So, I think we will continue to look for deals of that nature.

Okay. Quickly, what is the total fleet size now? At the end of the quarter?

41. 40? 40. 31 through joint ventures, and nine on our own account.

Great.

Most of those nine are still pre 9-11. Six pre 9-11 I believe? Five are pre 9-11. We recently acquired two A320's, in that account, that should perform very well.

Okay. Great. Thank you.

Thanks.

Thank you, sir. Our next question comes from Tyler Hojo, from Sidoti & Company. Your line is open.

Hi. I guess I'm not sure if you guys mentioned this before, but are you maintaining your kind of company wide outlook, in regards to kind of a mid teen type top line growth rate, and near term margins of 10%, and longer term of 12.5%?

Yes. Absolutely.

Okay. Good to know. I guess, moving on to something else, the margin in the, gross margin in structures seemed a little bit lighter than where you guys have been tracking the past few quarters. What could you attribute that to? Is that more of a mix issue? And with the big containers contract, should we see that kind of trend up, or your comment there would be helpful.

Okay, so let me answer the container contract item first, because that's real easy. That is yes. Margins will improve with container mix in the mix.

To your first question, it is a combination of a little bit of mix, and also challenges at our cargo systems business. So, we made this move, if you will, and we anticipated that the move would be completed. We continue to operate at two facilities, both in Detroit, so we have the remnants of the operation up there, and we're still slowly transitioning, down to North Carolina. You know, there were some issues around FAA certification that took us longer than we had expected. So, gradually, that work will move totally down to North Carolina, at which point in time, we'll see a little bit more, better margin footprint. So, two things. Mix to a small degree, and cargo systems to a larger degree.

Okay. And to your transitioning point, when do you expect that to be completed, the transition, that is?

I think we're looking in the-- less than 30 days now. Sometime this quarter. Let's say sometime before November, let's say. Before November. Before this period is out. It should be complete in the second quarter.

Okay, great. David, last quarter you mentioned, or you provided some commentary indicating a $5 million to $6 million type quarterly run rate for the unconsolidated JV. What gets you there? You need to sell aircraft to get to that number? Or how should we be looking at that?

You know, obviously the fleet size is increased. So, our base has increased. We have a very attractive return, on our large purchase that we made, so we have a nice quarterly run rate, let's say, that has a level let's say twice, what the run rate would have been a year ago at this time. Maybe even slightly better. And then, you know, we're looking opportunistically to dispose of assets through those joint ventures. We probably won't be disposing of any of these 737s that we just bought, for a period. We're enjoying good returns.

And I don't think we want to go ahead and necessarily cycle out of those at this point, but we will be cycling out of the aircraft, you know, over the next three to five years. So hopefully by the end of the lease, we may have some that remain that we put on lease with other parties. Hopefully we'll cycle through. The income from those trades would come through the joint venture line.

As we acquire other assets like the 747-400, and joint venture, the income, the quarterly income, the lease income will come through that line, and then if the right opportunity presents itself with that asset, we would look to trade that as well. I think the baseline of income for that line will be improving and then I think you'll see from time to time, there will be trades that will make that number more attractive, or appealing.

Okay. Thank you for that. Just one more quick one here.

Sure.

How many bays are currently utilized at Indy? I think you mentioned maybe getting to nine bays.

I think we're at eight bays. Nine lines. Eight bays, nine lines.

Okay. I know the focus obviously is on margin there. But do you anticipate kind of filling that up by this year? Or does that really depend on margin? And where you are with margin, I guess I should say.

Job number one. We're happy with the work we have right now. We have got to get the margin right. And Tim mentioned is his comments to Peter, there is a contract negotiation with one of our customers there that helps us improve operations, or results out of operation. I think you know, if we get a good 90-day period under our belt, then I think we can look to bring in more business. We do have some demand for additional business, and that's what's giving us a little more courage if you will, in terms of how we're looking at the future prospects for that business.

Okay. I guess just one more. How should we be looking at this kind of near-term goal of 10%? Is this kind of a year goal? Is this a quarter out?

Let's get back to you on that. Let us just kind of digest all of the stuff that's going on here. But it is still, for us, let's call it a very near-term goal, but I don't want to say it is going to be here tomorrow. Let's get back to you on that.

That sounds fair. Thank you very much.

Thank you.

Thank you, sir. Our next question comes from Troy Lahr. Your line is open.

Thanks. Could you guys talk a little bit more about the contract restructuring? You said-- have you completed the negotiations or are you still going through the negotiation process?

We're going through the negotiation process, so yes, we're going through the process.

And when do you expect that to be finalized?

Very shortly. Very shortly.

Okay. So, you think it will be impacting your next quarter numbers.

Yes.

Is it a big needle mover, enough for us to see a recovery from this level, of what we just saw in the quarter?

It is not insignificant for that business. So, it is a needle mover for the business. When you look at the entire Corporation, I mean it will move margins in the right direction.

I mean for MRO, we should see the improvement.

Yes.

Okay and is it just-- is it the whole contract with that customer, or just one particular aspect of the business?

It is basically a piece of the contract, relating to the hours that we're spending on the fifth piece of the contract. That's the major piece of negotiations.

Okay. And you said you had difficulty-- with the difficulty on the aircraft, was that one plane or multiple planes?

We had a couple of airplanes from one customer that cycled through our Oklahoma facility during the summer, which required a slightly different kind of maintenance than we've had in the past with that customer. And we cycled through those airplanes, so those airplanes basically, we'll not see those-- that situation develop again there, in our Oklahoma operations.

So, I mean it is not really an issue with Oklahoma. It is just you have some new work going through there, and that's kind of the normal learning curve.

Correct.

On new type of work.

A different kind of maintenance, not new work. A different maintenance requirement for similar aircraft than what we've had before.

Okay. And you don't expect to see that type of work again through Oklahoma, or if it comes through again, you'll know what you're doing.

If it comes through again, it will be more profitable for us.

Okay. And lastly then, on Reebaire, could you maybe quantify, how much additionally you had to spend, to kind of get the integration to where it is?

Not much. It is not a question of spending money. It is a question of getting the right procedures in place to bee consistent with other MRO operations that we have at the company. We pride ourselves on our relationships with the FAA and our relationships with customers. That's job number one. You know, we just had to put a little bit more discipline into the operation than we anticipated -a few more procedures. We had to transfer people from our Oklahoma operations to keep a closer eye, and you know, we're in the process of getting that right. It is a relatively small operation, so I don't want to put overweighting on this. But we have our eyes on the business if you will.

Lastly then, if you look at the Supply Chain logistics contracts that you have, like Mesa, Chautauqua, is there a chance, should we expect to see maybe another one put aside through the rest of the year, or where do you stand with new customers and the bid proposal activity?

We have a very robust bid. We've had that for awhile. Taking a little longer to, let's say bring these to closure than we would like to see, but we are working on some exciting programs as we speak. Keep in mind here, you know, we have a worldwide leadership position in this market, and you know, there is a fair amount of demand, and our people are ferreting through that demand, and hopefully we can bring another deal or so, to closure within this fiscal year of a meaningful magnitude.

Okay. Anything on the horizon regarding a Supply Chain contract for military vehicles at all? Kind of piggybacking off of the FMTV award.

The defense, the DOD business for our logistics business is strong. There is a backlog of opportunities that the folks are working on there. More on the-- we're very focused around what's going on in Huntsville. So, Army activity is very important for the company. So, we continue to try to expand that activity. Yes.

Okay. Thanks, guys.

Thank you. Our next question comes from Christine Min, from Calyon Securities. Your line is open.

Hi. Good morning.

Hi, Christine.

I just want to follow up on some of the questions that have been asked. On the JV side, with nearly double the size of the fleet, the $1 million in equity in JV line this quarter, is that a normalized rate for income from leasing revenue, assuming no sales?

No, Christine. It should be higher than that. The transactions that we've talked about here just closed really in the middle of the quarter.

Okay.

So, you'll see that come up.

Ok. And then are you anticipating any sales, either in your own portfolio or with your JV partners in the next quarter?

We're expecting a sale out of our joint venture pocket.

Okay. And then on the MRO side--

Christine, let me restate that. The sale that we're looking to make, is actually on our books. So, it would be an above the line transaction.

Okay. And then on the MRO side, are you still seeing a strong pricing environment generally, apart from the contract that you're currently negotiating? Or are you seeing some pressure popping up there?

No, pricing is not the issue. So, pricing is relatively strong. We entered into an agreement, at the time when we were looking-- you know, bringing some business into our Indianapolis facility. We were aggressive, and the other side, I think, was aggressive as well. And I think they recognize, that the work they're receiving is, they're pleased with, and I think we've shared with them data, sufficient enough data, that brings them to the point that they recognized that we need to be paid for more hours that we put into the aircraft. So, the rates are good. Rates are strong. No softness in that regard.

Okay. Great. That's good to hear. And on the cost side with respect to labor, are you seeing some alleviation there, or is there still some pressure on the labor side?

I think there will constantly be pressure on the labor side. We're still working with contract laborers for instance. We prefer to have more, a heavier weighting of our own mechanics. Part of that is a cost sensitive solution, and yes, I think there is some pressure on the cost side there.

Okay. Thank you very much.

Yes.

Thank you, ma'am. Our next question comes from Jon Braatz, from Kansas City Capital. Your line is open.

Good morning gentlemen. A couple of questions. In the press release, you make note of the new business, the $162 million business, and I think the $31 million business, in structures and cargo, and handling equipment, and so on. How much of that is really incremental. As I understood it, $160 million contract was really a renewal, but is that indeed the case? And how much really would be incremental new business?

Hard to measure precisely. But I would say that there's a piece-- I think you kind of nailed it. I think a piece of it is kind of recurring, if you will, and a piece of it would be incremental.

But would the $162 million, the bulk of it be recurring?

The bulk of it would be recurring.

Okay.

But by doing it this way, it is in a contracting vehicle that makes it easier for our customers to acquire the product. So, we think by doing it this way, we'll have a better chance of selling more of these items.

Okay, okay. Secondly, I maybe missed it when you discussed it in your opening commentary. You mention the SG&A cost you felt would be coming down by I think, $1 million per quarter, from the first quarter level. What was that due to?

Yes, Jon, actually what I said was that, we believe there was $1 million of nonrecurring expenses in the quarter. Some of it was severance related. Some of it was related to what we say--

Seasonal expenses.

Seasonal expenses.

Okay. But the seasonal expenses will reoccur next year.

Some will.

Okay, okay. All right. Then lastly, going back to the contract issues, both in Oklahoma and Indianapolis, I assume these contracts are very, very complex, and my question is, is there other contracts that might be up for renewal or-- not renewal, but refiguring, renegotiation if you want to call it that? Similar to what we saw discussed earlier?

I think we feel good about the contracts that we have, Jon.

Okay. All right. Thank you very much.

Thank you, sir. Our next question comes from Larry Solow from CJS securities. Your line is open.

Hi, good morning. In light of the recently increased credit line, could you just discuss your acquisition, the pipeline, the environment out there, what you're seeing?

We're looking at some things. We have one situation that's in our scope, let's say, that is progressing nicely. It will add to our Structures and Systems capability, a little bit more commercial bend than the defense bend, but also with some defense activity as well. That one is moving along nicely. We're continuing to look at properties that are available to us, yes.

Okay. And in Structures and Systems, the A400M, is that still scheduled to ship toward the end of fiscal '08, or was there a delay in that?

It is scheduled to ship toward the end of fiscal '08.

It is still on schedule. I thought Boeing had a 90-day delay. Or is that just--

That's the-- the Boeing is a different aircraft. That's the 787.

Okay. Could you just briefly discuss internationally on the Aviation Supply, how is that looking?

Larry, it looks good. The Supply Chain segment has opportunities, really across the globe. There's a lot going on in Europe. There's a lot going on in Asia and there's a lot going on in North America.

Okay.

In terms of the quarter, we had an increase in activity in Asia. I think Europe was about the same, but in terms of prospects, I think as David said, it is robust, and it is robust around the globe.

Okay. Then you still expect mid teens, double digit growth for Aviation so far this year?

Yes. Thereabouts.

Okay. Great. Actually, one last question. Last quarter, you had mentioned an MRO, that you had potentially a new customer maybe occupying a bay in this coming quarter, or in the fall I believe had you said. Is that still on schedule?

We talked about the Southwest line, Larry.

That's it. Okay. Because I thought if I'm not mistaken had you mentioned Southwest in July, and then a potential new customer occupying the bay in the fall.

Yes. It is not a new customer, but there is a new line from a current customer that started in the fall, and that's what translated to the one incremental line for the business.

Okay. Great. Thank you.

Thank you, sir. Our next question comes from Chip Cruice, from Greenville Capital. Your line is open.

Good morning.

Good morning.

In terms of the SG&A comments you made, you said that there was about a million more of spend, than will be in the future quarter. Would you expect the actual dollars to be down in the second quarter on SG&A?

Yes.

And then my last question, gets into the segment data. I notice that in looking to-- comparing it to last year's margins, it looked like both-- I know you've talked about the Structures and Systems, so I'll concentrate on the Aviation and the MRO. Looked like both margins, the gross profit in both of those divisions was lower than it was the year before. The year before it was, for instance, the Aviation Supply was 23.6 if you add back in the impairment charge. This year, it was 22.4. In terms of the MRO, it looked like it was 14.4 last year, and 12.8 this year. Do you see getting back to those levels soon?

Chip, I think the math for 2006 on Aviation supply chain is not right. You may have added back in the entire impairment charges that the company took first quarter last year. Only a portion of that was Supply Chain related. The other was related to our aircraft business. So, if you do a pro forma calculation, which we did for you, if you do a pro forma calculation, you would find that the Aviation Supply Chain gross profit last year was 21.2. All that is, is the actual reported gross profit, plus an add back of $4.8 million.

Okay. I just added back the $4.8 million to the gross margin that you had, the $22.3 million approximately this year, for last year that you recorded, and you know, that's how I got the 23.6. So, what you're saying is I need to go back to the prior year, and look at the pro forma?

Yes. If you want to do that off-line, I can work you through the math more specifically. The short answer is, even if you pro forma adjust the impairment in that segment, the segment increased 120 basis points.

Okay, good. Then the MRO was my second question there. It looked like it was 14.4 a year ago and 12.8 this year.

That is correct. Really, that's the impact, or that's driven by what you've heard so far today, about you know, we had some trouble with aircraft, with two different customers. One is contract related. The other is just, you know, we don't think that will be with us for a long time.

Can you just estimate, did that account for 100 basis points, do you think?

We don't have it precise, but we think it is definitely the main driver.

Okay. Thank you very much.

Thank you, sir. Our next question comes from Eric Hugel, from Stephens, Inc. Your line is open. Mr. Hugel, your line is open.

I'm sorry. I had mute pressed. Hey, guys, I just wanted to follow up with you with regards-- guys, can you hear me?

We can. Every other word.

Sorry. Just wanted to follow up with you, on the Structures and Systems business. You had said that you were expecting after you got through the move down to North Carolina, on the cargo systems business, that the margins would tick up. I mean, I guess, if you look at last year, I mean I guess if you take out the first quarter, I mean you were in the high 13%, 14% range. Is that a number that you think you can get back to, in the, let's say second half of the year? And sort of progressing toward that, as we head into the second quarter?

Eric, one thing you have to keep in mind when you go back a year ago, we did have some more container activity, which, as you know, was some of our higher margin activity in the mobility business. So, you got a few different moving pieces other than the cargo systems business, but I think the short answer to your question, is yes.

Okay. Have you disclosed how much you spent on the-- I guess all of the-- I guess we'll see it in the-- when you put out the Q, but have you talked about how much you spent, during the quarter, on adding to your aircraft portfolio?

Yes, you'll see it on the balance sheet. I think David has alluded to it here. The major acquisition was the large portfolio, related to Malaysia Airlines, the 18 aircraft and as he told you earlier, 180 million, almost 190 million of asset value, and our investment was about $18 million there.

Is that just basically a sale lease back? Malaysia is still operating all of those planes, now on lease?

Yes, they are. Yes.

Okay. And can we talk about, I guess at Indianapolis, I guess in the past, I guess you have the cost issues, but can you talk about hiring people, and sort of where do you stand, and what do the prospects look like there, for bringing on the number of people that you need?

Well, we have-- we're doing okay. We would like to be doing better. We have a variety of hiring programs going on. We're partnering with a local aviation university that we believe is going to be a great source-- a great source of talent for us. We're partnering with the local community colleges, so I think it is a little tight, as we've said. We're still able to go ahead and bring in people. So, I would say we're working through it.

Okay.

It is an industry wide situation. And some of it is related to specific skills. So, we're-- in addition to going through outside sources, we're also having internal training programs for our own people who want to go ahead and learn some of the specialties that are in such high demand.

Okay. Great. Thanks a lot, guys.

Thank you, sir. Our next question comes from Paul Carter from Evergreen, your line is open.

Thanks, guys. My question was answered.

Thank you. Our next question comes from Stan Manne, from Manne Family Investments, your line is open.

Hello, gentlemen. Good job. I have several questions. One, what potential do we have in available capacity for MRO and Indianapolis and Oklahoma?

Well, ok, so we're occupying eight hangars, as we've said earlier, and we have access to ten. So, that's part of the story. There's other business that is ancillary to doing the heavy maintenance, like line services, and engineering services, which we have a tremendous amount of capacity for growth there. So, you know, as it relates specifically to hangar space, you know, we've got some capacity. As it relates to the other services we can provide, there is plenty of runway for us to expand.

What about Oklahoma and others?

I think that-- I think that, you know, we're still out there looking for work. We have capacity to take on additional work. We're not at the end-- we're not at the end of our capacity, and frankly, there are other ways for us to go and get capacity in the market, at the right time, if we need it.

Okay. Second question, can you give us a frame on the expected tax rate for all of '08 fiscal?

Yes. Stan, as we talked about at the end of our fourth quarter, we thought our effective tax rate would be between 34% and 35% for the year.

Okay. Different than this quarter.

Well, this quarter, you'll see we're at 34%. You know, we'll continue to refine that as necessary as we get to the end of the year.

What about D&A for '08. Does it change from your previous, with the acquisitions, et cetera? You had about 33 to 33 mil for '08.

We might be-- we're still shoring up some of the purchase accounting issues, related to our acquisitions, and that will have an impact on what the amortization we have for intangible assets. I think we're still working through that a little bit. It will probably be slightly higher than what you said.

Okay. Last question, there is a rumor going around about United selling off, or getting rid of, all of their maintenance operations. Are we involved or is there something for us in that?

There may be, there may be.

There may be. What would be available? Are there additional bays, or maintenance centers around the country, around the world?

Just being reviewed at this point in time. Not really sure, Stan. That's why I say, there may be.

May be. Is it a sizeable entity? The rest of it?

Yes.

It is. Okay. Thank you very much.

Thank you.

Thank you, sir. I'm currently showing no further questions in the queue. I would like to turn the program back to you.

Thank you very much for your questions today. And hopefully we shed some light on the business. We feel very good about our position. Pretty good about the results. Obviously, we need to make some improvements on the margin side, and we're working it. So, thank you.