AAR Corp (AIR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the AAR Corporation fiscal 2008 fourth-quarter conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's presentation, Mr. Chris Mason, Director of Corporate Communications. Mr. Mason, you may begin, sir.

Thank you, Howard and good morning, everyone and thank you joining us on our call today. 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 yesterday afternoon, as well as those factors discussed under Item 1A entitled "Risk Factors" included in the 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. So at this time, I'd like to turn the call over to AAR's Chairman and Chief Executive Officer, David Storch.

Thank you, Chris and good morning. Joining me today in our boardroom is Tim Romenesko, our President and Chief Operating Officer and Rick Poulton, our Chief Financial Officer.

I would like to kick off my comments today by recognizing the awesome contributions and performance of the men and women of the AAR team around the world. I have never seen a workforce as committed, dedicated and connected to each other and our markets as we have today. Our leadership team is committed to providing the best workplace possible, a place where our people can make a difference and have the opportunity to be the best they can be. Tim has done a great job in his first year as COO and Rick has brought an invaluable dimension to the CFO role. Terry Stinson is making a huge difference leading our Structures business and Don Wetekam has been a fine addition to leading MRO. Jim Clark is maturing into a force providing superior leadership to our supply chain team.

As noted in yesterday's earnings announcement, fiscal 2008 was an outstanding year for the Company. We achieved record sales, record net income and record earnings per share. Sales growth in each of our principal markets was strong. We strengthened our liquidity with a $250 million convertible debt offering and generated over $65 million in cash from operations during the second half of the year, $44 million coming in the fourth quarter. We also saw a meaningful improvement in our asset efficiency ratios. Inventory turnover increased to 3.3 compared to 2.6 last year and our working capital turnover improved to 4.4 compared to 4.0 in fiscal 2007.

The Company's financial performance is the result of our focus on gaining marketshare through innovation and execution, expanding and diversifying our customer base both here in North America and abroad and by continuing to increase our value proposition to our defense and commercial customers as they seek ways to reduce costs.

Based on questions that we have been receiving over the last several weeks, we believe the market may not fully appreciate the spread of business we have here at AAR. In many quarters, we are merely seen as an airline aftermarket provider. While that was more true earlier in the decade, today, AAR is a much broader company, servicing a wider customer base. For fiscal 2001, sales to defense customers were approximately $139 million or 15.9% of fiscal 2001 sales. For fiscal 2008, consolidated sales to defense customers were approximately $520 million or 37% of sales.

We provide our defense customers performance-based logistics, specialized mobility and precision machine products and maintenance and overhaul services. Our defense systems, a business unit inside the supply chain segment, was a $16 million productline in 2001. Today, sales are in excess of $100 million or a seven times growth rate during this period and this business offers support to the DoD and customers in Europe.

Our mobility systems business in our Structures segment has strengthened its position by acquiring Brown Engineering giving us valuable integration expertise. Growth for mobility has also been driven through product innovation. Products developed and engineered the past four years generated $90 million of revenue in fiscal 2008.

Our products are on a number of outstanding defense platforms, including the A400M military cargo plane and the F-16, F-22 and joint strike fighter or F-35. We also have content on the CH-47 and S-92 helicopters and various ground vehicles. We feel good about the mix of product and services we offer to the defense markets.

As for the commercial market, it is very difficult to predict the long-term impact of oil at $135 to $145 per barrel on the global airline industry. As witnessed by our results through May 31, our businesses providing support to airlines have been solid. I will attempt to provide color for each of our segments.

For fiscal 2008, sales in the Aviation Supply Chain segment increased 12% to $606 million and account for 44% of consolidated revenues. Sales within the Aviation Supply Chain segment is diversified with 42% to North American airline customers, 35% to international airline customers and 23% to defense customers.

As U.S. airlines retire aircraft and reduce capacity, it creates both opportunities and challenges. AAR is a leading provider of cost-effective inventory solutions to airline and airline support companies all over the world. Over the next 48 months, we expect aircraft to change hands, creating opportunities to one, acquire aircraft for disassembly and two, support customers as they integrate aircraft into their fleet and require inventory for maintenance and line support. During fiscal 2008, sales to customers outside North America in this segment increased 15% versus 2007.

For fiscal 2008, sales in our MRO segment increased 42% to $301 million and account for 22% of fiscal 2008 consolidated sales. Activities in the MRO segment are more closely tied to the North American airline market with 81% of sales generated by U.S. carriers, 8% international airlines and 11% defense customers. We have experienced tremendous growth in this segment as we gain marketshare and increased our MRO capacity and capabilities. Our Indianapolis facility met their financial goals in fiscal year 2008 and the acquisition of Avborne, which was completed in March, brings widebody capabilities and Airbus experience at a major international gateway city.

Recent capacity reduction announcements by U.S. carriers have impacted our MRO segment. As a result of United's decision to ground their fleet of 737s, they no longer require heavy maintenance. Further, we expect reduced volumes from certain of our other customers at our Miami and Oklahoma City facilities. We have successfully replaced two of three United lines in Indianapolis and are pursuing opportunities with new and other existing customers to replace the remaining United vacant line and other openings. To keep things in perspective, even with customer movement, we expect growth in the MRO segment in the first quarter and for the fiscal year.

As most of you know, in late March 2008, the South Florida office of the FAA issued a notice to our landing gear service center in Miami, taking exception to the paint we applied as an anticorrosive to certain landing gear types. There was minimal to no customer impact and no financial penalties or rework as a result of the FAA notice. Our landing gear center experienced no disruptions. In fact, had record sales in the fourth quarter and for the fiscal year.

Mesa Airlines is a customer for the Company and in May 2008 warned they my file for bankruptcy protection if they cannot resolve a contract dispute with one of their customers. During fiscal 2008, consolidated sales to Mesa were approximately $73 million, of which $56 million was in the Aviation Supply Chain segment and $17 million in our MRO segment. At May 31, 2008, we have inventory and other long-term assets on our books supporting the Mesa supply chain programs in the amount of $55 million and also have trade receivables and other assets associated with Mesa of approximately $13 million. As of today, Mesa is current on their obligations. We continue to support their operations, but are planning for reduced volumes in fiscal year 2009.

Our Structures and Systems segment continued to perform very well with fiscal 2008 sales increasing 47% to $389 million. Sales in Structures and Systems account for 28% of consolidated 2008 revenues. Mix in this segment is 86% defense, 5% international and 9% North American commercial. We have invested heavily in this segment in both capacity and capabilities the past two fiscal years and believe we have excellent platforms for continued growth.

Let me give you some highlights of some of the businesses in this sector. In February 2008, we announced a significant increase in our composites manufacturing capacity with an expansion into a facility at the former McClellan Air Force Base in Sacramento. This facility complements our existing composites business. We're seeing a significant amount of interest in our composites capabilities and expect to begin manufacturing operations in the new facility by August.

SUMMA Technology, which we acquired in December, has become a meaningful contributor to our results. In addition to increasing our addressable markets, SUMMA has a number of long-term programs, including positions on the joint strike fighter and several Gulfstream jets. Progress on the Airbus A400M cargo system continues to track with the scheduled rollout and the first flight of the aircraft is scheduled for the latter part of this calendar year.

Expected revenues from the sales of the A400M cargo system, excluding spare parts provisioning, exceeds $300 million. We expect to ship the first revenue-producing system in late 2009. To date, Airbus holds commitments for 192 aircraft, mostly to investor countries, including France, Germany, the UK, Belgium, Spain and Turkey. Overall, the funded backlog for the Structures and Systems segment, excluding the A400M, is more than $300 million.

During fiscal 2008, sales in Aircraft Sales and Leasing increased $46 million and accounted for 6% of annual sales. We currently have 37 aircraft in our portfolio, 29 of which are owned through joint ventures and eight aircraft which are wholly-owned. At May 31, 2008, our total investment in the aircraft portfolio, including joint venture and wholly-owned aircraft, is approximately $121.5 million. During fiscal 2008, we achieved a 15.5% return on our portfolio of aircraft.

All aircraft in our joint venture and wholly-owned portfolio are currently on lease and 24 of the aircraft are on lease with carriers outside North America. Five aircrafts come up for lease renewal in fiscal 2009. For the five aircraft that are up for lease or renewal in fiscal 2009, we are close to an agreement to sell two, we're looking to extend the lease for one and are busy at work placing the other two aircraft, one of which comes due in March 2009 and the other in May 2009.

We have experience and effective distribution channels for the sale and lease of aircraft outside North America. Further, we believe that many of the 737 classics that are being retired from North American carriers will be absorbed in the worldwide fleet and replace other older aircraft. For example, there are still over 900 727s and 737-200 series aircraft, which are in active service worldwide.

As we generate cash, we will look to opportunistically reduce our obligations or acquire our shares as we deem appropriate. In June, we acquired 12 million of our 1.75% convertible notes for $10.6 million. In addition to the gain we will record in the first quarter of fiscal 2009 on this transaction, the number of shares and the diluted EPS calculation will be reduced by 408,000 shares.

AAR today is a more diversified enterprise than we were entering the last downturn post 9/11. Many of the major U.S. airlines began to outsource their airframe maintenance after September 11 and we added substantial new capacity and capability as we took on the Indianapolis and Miami facilities to service this market. We also opened a low-cost manufacturing center in North Carolina to produce more defense products and added new site locations to support defense logistics programs in the United States and in the UK.

We acquired Brown Engineering and SUMMA Technology. Expanding our integration services and high-end manufacturing capabilities, strengthening and diversifying our portfolio, an intense focus on execution and adding engineering content have allowed us to capture marketshare and have contributed to an almost doubling in sales over the past three years. At May 31, our backlog, which excludes sales for the A400M, has increased to $465 million from $315 million last year.

The focus at the Company remains squarely on cash generation, strengthening our balance sheet, solid execution, cost control, more engineering content of product that we sell, finding niches while investing in assets and process improvement, positioning AAR to offer our customers a powerful value proposition. I would like to thank you all for joining us today on the call and at this time, I would like to open up the phones for any questions you may have.

(OPERATOR INSTRUCTIONS). Troy Lahr, Stifel Nicolaus.

Can you guys just briefly kind of walk through what happens and what your level of confidence in is going to be in your ability to capture some of this work in international markets as U.S. aircraft -- as aircraft leave the U.S. market and go to international markets? Are you pretty comfortable that you're going to be able to keep servicing those aircraft?

I think we will provide different services for those aircraft. It is possible that we will provide repositioning services for the aircraft, but most likely around component support and inventory support for those aircraft. But also think of us also as possibly being a servicer of the whole aircraft itself through our Aircraft Sales and Leasing subsidiary.

Okay. Do you think you would be running into new competition? Are there similar players out there in the international markets doing what you do on the parts overhaul side of the business and things like that as well? Do you think you should be able to penetrate that pretty affectively?

I think our parts support business is a leading business in the world and I believe we will capture our fair share of that business.

Okay. Then talking about capacity cuts from your international mix, have any of your international customers on the commercial side talked about scaling back capacity and things like that?

None of our active customers have approached us in that regard. Troy, keep in mind that in our supply chain business, 35% of our business is to international carriers. So we haven't seen the same kind of discussions that you have seen here in the United States.

Lastly then on the lease portfolio, do you think the portfolio, for the next 12 months, stays the same size or do you think gradually shrinks or how should we think about your lease portfolio at 37 aircraft?

Yes, like it has always been. It is going to be approached very opportunistically. So if the right opportunities come up, we will be in the position to capture those opportunities most likely in joint venture fashion as we have done over the past few years. As I sit here today, it is hard for me to predict what that might look like, but I think over a 12 month period, I wouldn't be surprised if you see some opportunities come our way.

Okay. Thanks, guys. I will jump back in line.

[Larry Solo], CJS Securities.

On the Aviation Supply, your gross margin actually seems to have actually exceeded your historical highs and I know you were working on some improvements in your component repair shop and perhaps you even have talked about in previous quarters, looked like your revenues were down a little bit as you maybe didn't turn away revenue, but looked like you were focusing on a better mix. Can you kind of talk about that and are these higher margins sustainable?

Well, we clearly saw better margins in our repair businesses in New York. We are still working on margin improvement in Europe and I believe that we are, in the supply side, we continue to gain good positions both through the acquisition of inventory, as well as customer relationships. So you will have noted in the fourth quarter that our international business in this segment grew 15%. I think the quality of our inventory, the quality of our relationships I think have improved and we are -- I can't say we're going to exactly hold to these margins because they are exceptional, but I think directionally, you are going to see margins continue to be very strong in this piece of our business.

And you mentioned international, so just touch on that briefly. Do you have consolidated numbers for the Company as a whole for the year on what international growth was relative to domestic? You guys sometimes provide that. I don't know if you have that.

We can get that, but keep in mind now we have had tremendous growth in Structures and Systems. We have had tremendous growth in MRO and both of those businesses are less international by nature.

Right.

The MRO -- our facilities are based here in North America and mostly -- most of our customers -- I think we have communicated 81% of our business, if I'm not mistaken, is domestic and the Structures business is largely DoD-related, although we're getting good growth in the markets where we have a chance to get international business. As you look at it from a consolidated standpoint, you might not see the same dynamic.

Larry, when we file our 10-K that international figure will be in there.

We'll get more color on that, right?

Yes, but I think to echo what David said, it is given the growth in two areas that don't have as much international exposure. I think the enterprise number will be more flat.

Okay. Could you talk a little bit more about how Avborne, the integration is going? And I think we talked last call a little bit about your entrance into the Miami facility has international exposure and that might actually help you facilitate more international opportunities.

Sure, Larry. The Avborne integration is going very well. They are very busy down there. There are summer months that -- late summer gets a little slower and then picks back up in the fall, but we are very pleased. We already are seeing an international flavor to the customers that we have in there. All in all, I think it is going very well.

Last question. You mentioned the Indianapolis and the MRO. If I am not mistaken, United is now completely -- you're not going to be doing any more work for United, is that --?

We are not doing any work for United right now. They are out of the facility.

Okay. What is your utilization -- the total days? I guess you said you lost three from United, you have filled in two. So does that mean there is just one empty bay or what is --?

There is one bay available from our baseline and then there is additional capacity that we can have access to when we are in a position to take it on. But there are -- replacing the three United lines with two additional lines has some kind of near-term inefficiencies, but we are working through those and we expect to really be back at capacity here near-term.

So essentially, you're occupying -- once you fill in two of the three, you'll be occupying nine of the ten days; is that right?

Yes.

Great. Thank you.

Tyler Hojo, Sidoti & Company.

First question, just in regards to Avborne, what was the contribution in the quarter for that?

From what perspective?

Revenue contribution, sorry.

Tyler, it was pretty consistent with what we had talked about earlier. The size of Avborne we had always said is it's a bit smaller than Indy, so it is a business that will be more in the $50 million to $70 million a year range of revenue. And right now, we are executing on that and you had a quarter's worth during the year. So you can do the math.

But you also had SUMMA in there as well, right, incremental?

Yes, I am sorry. I thought you had just asked about Avborne. But yes, SUMMA was also part of the nonorganic growth in the quarter.

What was the contribution from SUMMA then?

I think last quarter it was $25 million, something like that.

That is what we had talked about in the past, is the approximate size of SUMMA, right.

Okay, that's fine. I guess, David, in your prepared remarks you indicated MRO would be up next year, I think, if I heard that correct.

Yes, that is correct.

Is that including Avborne or is that organically up?

All in, Tyler. It is all in.

Just lastly, historically you have kind of given us a long-standing companywide growth goal, as well as a margin goal. And I understand things are tough, but are you still sticking with that mid-teen growth including acquisitions that you made? Do you have a nearer term margin goal for us?

Well, I guess our position in this regard, Tyler, is that if you look at the results through May, we had solid results. The business continues through June at the same pace. We see lots of opportunities for the Company and yet, we don't fully have a grasp on the $135 to $145 a barrel and what that means on a sustained basis, as I indicated in my prepared comments.

We have great positions on the defense as I have indicated. We feel really good about our supply chain businesses and as I have indicated, we expect MRO to be up on a year-over-year basis. We prefer to stay away at this point in time from any forecasts, but as we sit here today, we feel good about our positions and we feel good about our businesses.

Okay, thanks for that.

J.B. Groh, D.A. Davidson.

Good morning, guys. I was wondering if you could maybe address inventory. You did a little bit on the Mesa side, but just in general, inventory related to the planes that seem to be coming out of service, the MD-80s and the 737 classics and kind of what your thoughts are there on the quality of that over the next 48 months.

We are very selective on the acquisitions that we are making to support these kind of asset categories, but there is still a significant number of shop visits for the engines in particular. It is not like we are completely out of these markets. So we're focused on our inventory turns. You heard David comment on our improvement year-over-year in inventory turns. We are focused on our hold periods for the assets that we are acquiring and we're looking to reduce our exposure to certain asset categories and increase in others. We are very focused on this. We are very opportunistic in terms of looking for the right ways to play it. We are just factoring all of these kind of moving pieces into our thinking as we acquire assets and dispose of assets.

I guess another question along that same line, it looks like you increased your allowance for doubtful accounts, you have sharpened the pencil on the AAR as well, but I am guessing that is probably a pretty keen focus for you at this point in time, both those areas.

Absolutely and in spite of the increase in the bad debt reserve, we did have a nice improvement in DSO as a result of the focus on collections and on our exposures.

Then on the MRO margin, it has been a while since it has been that good. What is the contributing factor there over last year? Is it part Avborne or is it more Indy learning curve issues?

It is a combination of things. So we started with our lean initiative across the different centers and that I think is starting to have an impact. We have got volumes up, which is helping margin. We have got some diversification in MRO through engineering services. We are taking on more paint work, we're looking at getting into seats and all of that I think is and will contribute to margins. Avborne is helpful. So I think it is a combination of factors.

Great. Okay, thanks for your time.

[Stan Mann], [Mann Investments].

First, gentlemen, great job in 2008. Have a couple of questions. One on the backlog that you show, the $465 million, what period of time is that shippable in? Is it six months, all in the year? Do you have any feel for that traditionally?

The vast majority of it is in the next 12 months.

It is?

Yes.

Your operating margin goal -- it was alluded to, but you set a goal of 12% plus, David, during this last year. What is your sense of achieving that?

Yes, Stan, I think the keys to achieving that goal are the sales growth, fix underperforming companies. We had three underperforming companies at the start of the year. We now have two underperforming companies. Of those two, one will be greatly improved when we start delivering A400M systems.

Another key element is driving down costs. We had a little blip in costs here this quarter. Got our arms around it at this point in time and hopefully get our SG&A back below our stated target of 10% and income from JVs. So it's -- a piece of that drives that 12.5% margin is to have a steady stream of income coming out of the JVs. We have been successful through the first three quarters of the year in making sales of aircrafts in our JVs and this quarter, we did not have any. We do anticipate that we will have some of those sales in the next year, but I think when you add up those four elements -- sales, fixing underperforming, driving down costs and income from JVs -- that is what drives us to our 12.5%.

The markets, in terms of growth, yes, we think there is growth potential out there, but we're driving the business more around some of the things I indicated before, taking marketshare and driving through execution and watching our balance sheet and generating cash. Until we understand what the $135 to $145 a barrel means, we want to keep our power dry and that may cause the 12.5% target to take a little longer than we anticipated. But nevertheless, that is what we are marching toward. The organization is focused on that and we have, throughout our businesses, we have a clear understanding of the measures that we need to take and that is how we are managing our business.

Just last question, you mentioned Indy and Oklahoma and you mentioned in your write-up that you have put a lot of the Southwest airlines MRO in there. Is there more business at Southwest? Also there are rumors that you are starting to do or are doing business with a couple of the gigantic freight carriers like FedEx or UPS. Could you speak to what is going on as far as filling up those lines with --?

Yes, these are all very important customers. One of those customers has filled some of that United space that we talked about. We are working with all three of those customers to expand business. I think we have had some positive traction in that respect. So yes, you have identified three very important customers for the Company.

Okay. Good job. Thanks.

Eric Hugel, Stephens Inc.

The $1.5 million allowance for doubtful accounts, is that in response to a specific write-off or is that just you guys being conservative given the current commercial environment?

It's a specific attribution, Eric.

Okay. With regards to -- I understand the commercial visibility on the commercial side is pretty limited, but I would think that your visibility on the military side is much more visible. I guess, one, can you give us for the fourth quarter, if you look at the military side, what kind of organic road did you generate and is that level sustainable or are there opportunities to accelerate that going forward into next year?

I think, Eric, so I guess what we can say is the contribution of our defense businesses in fourth quarter was higher than the 37% we saw for the year. So we were about 39% for the fourth quarter, showing that the trend is towards and the growth rate on the military side was higher. I don't have the organic versus nonorganic split for that in the latest quarter or even for the year, but the military side is clearly continuing to grow.

And given the step-up in the composites side of the business, most of that is going to be military, is that correct?

No, there will be a good mix on the composites. There will be a mix between commercial, as well as defense and in that commercial, we will have some business jet work as well.

Okay. Any more -- maybe you can set target as to by the end of the year what kind of sort of run rate you might be looking at or is it still just way too early? For the new composites business. I know we said over a longer term --.

I think it is a little bit too early at this point in time. Our plan is to have the combined business represent about $100 million of revenues in a five-year period, three to five-year period. Three at the aggressive side and five at the more conservative side. But I think you can look at a similar dynamic to this business to what we had in Indianapolis in MRO. We exceed our expectations in that business and it is possible to exceed our expectations in this business.

Moving over to the Aircraft Sales and Leasing side of this, I know one of the things that we have talked about with regards to that business is the drying up of liquidity in that market because of guys like CIT Group having issues. The issues at CIT Group seem to have mitigated. They have gotten financing from Goldman and some other things have gone on. Have you seen any improvement in liquidity in that side of the business?

Not really. I think the liquidity is still fairly tight. I think it would be fairly consistent with liquidity in other industries at this moment as well. I would say liquidity -- I wouldn't say it has eased up noticeably. I wouldn't say it has tightened any more noticeably. I think it has been fairly tight for a while here and I think that environment hasn't seen much change at this point.

We have sufficient enough liquidity, it is just -- there is sufficient enough liquidity for the industry obviously to function, but there isn't -- I would say the liquidity is tighter than you might otherwise want to see. But I think that is fairly consistent with what we signaled 90 days ago. We haven't seen a change necessarily in the last 90 days.

Finally, you guys have been talking -- I know it's in your pitch book and I know, Rick, we talked about it, on the supply chain side of the business, you guys have a verbal award on a military helicopter PBL type of deal. Is there any update there? Have you closed that deal, gotten written? If not, what is the process, what is the timeframe and what is holding it up?

That deal has not been finalized. The timeframe is still, let's call it, uncertain, but let me just add that the deal flow in that business continues to be fairly strong. We would anticipate the continuing growth rate in that business and keep in mind that business has grown seven times in the last seven fiscal years.

Okay. Thanks a lot, guys.

Richard Glass, Morgan Stanley.

Nice quarter. My questions have probably been answered if not beaten to death, so I will move on.

Jon Braatz, Kansas City Capital.

Good morning, guys. Obviously, you and everybody else in the industry are facing a lot of headwinds and it sounds like you're going to take a very conservative and cautious approach as we head into this year. My question is how do you balance that against maybe some opportunities that might arise -- acquisitions, buying inventory and so on? Again, can you go through and talk a little bit about your overriding philosophy for this year and how you are approaching this year given the level of oil prices and so on?

Secondly, assuming a very conservative approach to this year, do you have any goals and expectations in terms of how much cash flow you can generate this year?

Okay, we have been through cycles before. So we had, in the early '90s, we experienced Pan Am, Eastern, Midway, TWA, Braniff, etc. go out of business. We then had the crisis post 9/11 where 3000 airplanes came out of the system in very short order. In both those cycles, subsequent to both those cycles or as those cycles recovered, the Company found itself in much stronger positions in both cases. So going into the downcycle let's say of the early '90s, we were approximately a $300 million to $400 million. We came out of the decade close to a $1 billion company and in this decade, with this year just ended, we are at, let's call it, $1.4 billion and earnings power is greater today than it has ever been in the Company's history. So we have experience in dealing with these, let's call them, uncertain times.

The major thrust of what we do is provide services to people who operate aircraft and in the case of DoD not just aircraft, but also ground equipment and other products for the Army. And the key to our Company is staying close to our customer, understanding what it is our customer is looking for and then helping them solve their problems. As long as aircraft are operating, people are going to need inventory solutions, maintenance solutions and logistics solutions.

And we have I think demonstrated our ability through a lot of focus on -- Tim mentioned lean and I have mentioned execution over the years. We focus on these things and adding engineering content to provide more value to our customers. So as our customers enter what they consider to be maybe tougher times, they are looking for companies like AAR to assist them as they need to navigate through these times.

When we look at inventory today, when we look at investments, we are really keeping a close eye or very close communication with our customers, trying to anticipate together with the customers what their requirements are and then making the investments in anticipation of these requirements.

I think Tim alluded to inventory turns and working capital turns, part of my script and the essence there is that when we're looking to make these investments, let's look at getting our turns, let's look at the period of time that we can predict and let's go after those investments so we can get a fair return in that period of time.

If the opportunity is of a riskier nature, I think we're taking the position today that we'd prefer to stay on the sidelines. Looking at the investments carefully, we are very focused on supporting our customers. I think the last question was around defense, our defense customers and trying to get growth rates in our defense area to be superior to our growth rates in the commercial because we do have a little bit more visibility. We do have solid positions in those markets and we do anticipate continued strength in that arena.

As it relates to generating cash and the things that we are focused on at the Company, I tried to communicate, Jon, that what is key to the Company is cash, cash generation. If you look at the Aircraft Sales and Leasing business for instance, we have not bought an aircraft for that segment since November of '07. And if you look at the cash we generated in the second half of the year, it is fairly significant, $66 million of cash, $44 million coming in the fourth quarter.

So the focus remains on generating cash from the businesses, maintaining a very strong balance sheet so we can come out of this thing in a very solid fashion, assuming that this thing is as tough as the last couple might have been. Although we don't yet have an indication that that be case, focus on execution so we become more integral to our customers' operations whether he be defense or commercial, cost control, so keep our SG&A under that 10% targets, more engineering content so we go up the value chain for the customer, continue to explore and exploit niches, so find those areas that there are voids or the Company, through its capabilities, can master that niche. Tim talked about engineering services in the aircraft maintenance arena. We talked about line services, paint. These are all new-ish kind of opportunities for the Company to explore.

I signaled in my opening comments the growth we have seen in our mobility business for a new product that we've developed in the last few years. So we're going to continue down that path and make solid, prudent investments. Continue to focus on process improvement, lean initiatives because you are seeing some of the benefits from that. Those investments we have made in our MRO business and we expect some of that will bleed over to our defense manufacturing businesses as well.

David, thank you very much. One follow-up question. Obviously, you know the airline business better than I do. To the extent that we do get a drop in oil prices and back to $100 a barrel or something like that, do you believe that the airline industry capacity reductions would be reversed a little bit? How fixed is the domestic airline industry do you think in terms of those capacity reductions and are they flexible in a better environment?

I think that is a great question. My sense is if you look at the two fiscal years preceding this one for the airlines, they were very profitable here in the United States. So it is hard to say, Jon, actually how they respond to oil going back down to $100 a barrel. I think if you're flying commercially at all, which you will notice that most of these flights are, if not 85% full, at least 80% full. So even though loads have maybe come down slightly, they are still at very historical high levels.

The idea that there's going to be, I don't know how many, 11% I have heard up to 15% of domestic capacity coming out. It is hard to envision what it is going to look like at the airports when people want to fly and there are no airplanes to take them. I think that it is hard here to say how the U.S. carriers would respond to that. I would say internationally it would speed up the pace of growth elsewhere if oil was to go down to that level. I guess that is the best answer I can give at this point.

Thank you very much.

[Brian Nubaline], [DRW].

Just to get a little more color on the bad debt expense. I know you mentioned it was kind of a discrete issue, but is a something in a Mesa subsidiary? If I could just get a little more color.

It had nothing to do with Mesa. Mesa is current on all their obligations to us.

Okay. And is there anything you are adjusting with collection policy? Just trying to get some comfort on some of these companies that are customers that are obviously having a lot of difficulty. Is there anything that you're doing to make sure to avoid some of that going forward?

In a general sense, as you heard earlier, we are very focused on credit decisions right now and collections of amounts owed to us and as a result, our DSO on our receivables is at the lowest it has ever been in the history of the Company.

As a general rule, we have a lot of energy invested in that and are making sure we don't get overextended with any individual or more broadly have receivables outstanding longer than they ought to be.

With respect to Mesa specifically, similar approach with them. We have worked very hard in conjunction with Mesa to restructure some of our agreements and to say on top of our collection there to make sure that our risks there are as mitigated as possible.

That is helpful. Thanks.

[David Holme], [Averitt].

Can you tell me what the CapEx for the quarter was, please?

Yes, it was a little over $8 million.

And what's a run rate for 2009 would you think?

I think on a quarterly basis CapEx should be somewhere in the $8 million to $10 million a quarter probably.

Thank you. Could you also tell me what the split is -- I think you said in aircraft, you have got $121 million invested. I just wondered what the split was between JV and on balance sheet.

JV is about a third and balance sheet is about two-thirds.

Could you also talk about how you view repurchasing debt versus repurchasing shares? Your share price has come down a lot and how you balance those uses of cash.

Yes, the debt that we have bought in here, that we announced that we bought in June, was debt that is a convertible debt where the shares have been in the sharecount. In buying this debt at a discount, A, we get to reduce obligations, B, get a slight gain and C, we eliminate in the case of the acquisition we've made so far, we've eliminated 408,000 shares. So we're keeping an eye on both. We're trying to figure out, as we generate cash, what the best use of that cash might be. In the period -- in June, we determined that buying in these converts was a pretty good use of the cash as opposed to buying straight up the stock.

Right, and they are even lower now so --.

Shares are lower I believe and the bonds are lower.

Right. Do you anticipate further debt repurchases over --?

I think we are going to look at the cash generation from the Company and make prudent decisions as we have signaled based on the cash position of the Company.

The final question on how the airline -- one of the ways the airline might be reacting to these higher prices is trying to pressure their suppliers in terms of trying to get better deals and stuff. Have you seen any of that so far?

I think that is a constant item between us and our airline customers. I don't think there is anything more unusual today than there has been. We are, as I indicated, we are very focused on taking marketshare and the growth rates that we have experienced here in the last year exceeds any growth rates that the industry is forecasting. I think exceeds growth rates of if not every company, most of the companies in our industry. We are very focused on execution, taking marketshare and obviously, doing it at a profit. We also, as we signaled earlier, we are very focused on margins. So we want to do it all.

These are high-value solutions we provide to these carriers as well. So as long as we continue to increase the value we provide, it is good for everybody.

Okay, thank you. Keep up the good work.

Troy Lahr, Stifel Nicolaus.

Also are airlines going to be using more used parts as opposed to putting new parts on plans as they get more into cash conservation mode right now?

I think that is a traditional response to these tougher times.

Do you anticipate a slight pick-up in that used and overhaul business there, the used parts business?

The used overhaul parts business has been very strong, so we have no reason to believe at this point in time -- we have no signs yet that that business is slowing down. Yes, I think we continue to do what we have been doing.

Then also you mentioned backfilling work at Indy. What about Miami and Oklahoma? You mentioned some were coming out there. Have you been able to offset that work?

We are talking with people. We haven't necessarily lost the work yet in either facility, but we have -- we do know of certain holes that we have that we didn't previously have and we are in the process of filling those holes.

Lastly, on Aviation Supply Chain, you threw out some numbers there, saying kind of a mid teens growth rate for MRO. Can you throw out something for Aviation Supply Chain? Even if oil in the current environment -- should we think about this as a high single digit growth type business or still kind of low double digits? I know you don't want to put some numbers out there, but just could you frame it a little bit for us?

Let's go back to MRO. What we are saying is we're going to have growth. We didn't put a number around teens or whatever. We just said that we are anticipating growth in the first quarter and in the year, year-over-year basis. We are not putting numbers out there and I think the same in supply chain. We are going to keep executing and keep doing all of the things we have been talking about.

Okay. Thanks, guys.

J.B. Groh, D.A. Davidson.

I just had a detail question. Maybe you covered this on the five aircraft that are rolling over. Are those the balance sheet planes or are those JV planes?

Those are all JV planes -- wait. Three are JV plans -- four JV planes, one owned.

And I think you gave when they were rolling over. Could you revisit that? I am sorry. I didn't write fast enough.

The first three roll over in the fall, the ones that we are looking to sell to and extend the lease on one and the other two, one rolls in March '09 and one rolls in May '09.

So the sales would be in the second half of the year?

The sales would be in the second quarter.

Okay, second quarter.

Second to possibly third quarter depending on time, but right on the bubble of the second and third quarter.

Okay, great. Thank you.

Eric Hugel, Stephens Inc.

Tim, can you talk about, maybe at Avborne, you said the integration is going well. Can you comment? One of the issues -- one of the main issues at Avborne historically has been the stability of the workforce. Can you comment on that? Has there been any turnover? How are relations going there?

No, it has been a great workforce, Eric. The leadership team there is very connected to the floor. The turnover has been low. So that is not an issue.

Can you talk about -- what was the D&A in the quarter and what would be a good run rate going forward?

D&A was about $10 million, Eric, and I think that is probably a good run rate right now as well.

Interest expense was a bit lower than we are looking for. Is that a good run rate going forward or should that come down I guess as you guys are buying bonds or was their an unusual blip in Q4, you are going to see a bit of a step-up as we go into next year? How should we think about that?

No, nothing unusual and as you indicated, we had -- we did repurchase some bonds, so you will see a little bit of benefit from that.

With regards to I guess credit policies, are you starting to put more and more customers more on cash and carry types of things or are you still -- is that part of how you are monitoring? $1.5 million write-off, that is kind of sizable for one quarter from one customer.

We didn't say it was one customer. In fact, it was not one customer, but it was specific -- it was two different customers principally that related to.

To your question, cash and carry has always been a way of doing business. It is not a way we ever got out of entirely, but it is also not the preponderant way to do business. Our basic credit philosophy is people who deserve credit get it, and those that we don't have a history with or haven't demonstrated the wherewithal to have credit, we don't give it to.

Fair enough. Can you talk about also, you talked about your margin drivers and I'm just trying to get an understanding of how much -- the military business looks solid. Obviously, there is a big question mark around the commercial side of the business, but I don't think it is as bad as likely the market thinks. But how much of margin is really volume dependent?

How much volume leverage is there? If volumes drop off, are we going to see a disproportionate hit to margins, or do you think pretty much notwithstanding a major sort of huge cutback in capacity, that can largely be offset by the other aspects that you were talking about, improving efficiency and so on and so forth?

I think the core of your question, Eric, is really where does scale matter and where doesn't it matter probably.

Exactly.

I think certainly our SG&A pool benefits as sales are higher, and conversely, as a percent of sales doesn't come off as linear as sales might. So you have a little bit, I think, of benefit there. You can look at history as to how our SG&A has been relative to sales to triangulate around that if you want to.

I guess the other place it shows up slightly is in our repair businesses. The repair businesses tend to have a little bit of a fixed cost base to them, and so if volumes come down a little bit, you could have a little bit of margin degradation. And conversely, if volumes go up, you can have some margin pickup. But I don't think that's as big of an effect as the SG&A effect.

That is also -- you are seeing some good sort of opportunity to improve some of that offset that I was talking about, is in those areas too of fixing up these businesses. So maybe we won't see a lot of that market degradation if volumes drop off.

Right, I think that is correct.

Thanks a lot, guys.

Larry Solo, CJS Securities.

Can you maybe quantify, you gave nice numbers on Mesa; how much or approximately how much regional exposure you have in total? Because to me those appear like -- we never know who is going to go bankrupt next, but those appear like the more likely candidates. So could you just comment approximately what your total regional airline exposure is?

I think we will try to grab a number for you here quick, Larry, but I think your premise, though, is there are some regional carriers with some pretty deep pockets and arguably are in pretty good shape. So I don't think the hypothesis is exactly right. I would say as a rough order of magnitude, our entire regional business is about 10% of the overall company, across all aspects of our regional -- where we touch regional carriers.

So Mesa -- and Mesa seems to be about half of that then, I would say, right?

Yes, certainly Mesa is a good chunk of that, right.

Then just to confirm, for the A400, it expects to be up and running late -- hopefully by late this calendar year, and then you expect to generate revenues late in your fiscal '09 year, right? You said late '09, but that meant fiscal '09?

Correct.

Excellent, thanks.

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