AAR Corp (AIR) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to AAR Corp. first quarter fiscal 2011 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) As a reminder this program is being recorded.

I would now like to introduce Mr. Greg Dellinger. You may begin.

Thank you, Mary. Good morning, ladies and gentlemen and thank you for joining our second quarter fiscal year 2011 earnings conference call. Before we begin, I would like to remind you that comments made this morning may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We ask that you refer to the disclaimer contained in our news release as well as the risk factors section of the Company's May 31, 2010, Form 10-k. In providing forward-looking statements, the Company assumes no obligation to provide updates to reflect future circumstances or the occurrence of anticipated or unanticipated events.

And now, at this time I would like to turn the call over to our Chairman and Chief Executive Officer, David Storch.

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

Yesterday afternoon we announced our second quarter fiscal 2011 results. Sales were a record $447 million, an increase of 36% compared to the year ago period. Net income was $16.8 million and diluted earnings per share were $0.42 an increase of 24% over the prior year. On a sequential basis sales were up 8.5% and earnings per share increased 20%. The robust year-over-year sales growth was due in part to strengthening in the commercial airline market. This recovery, which we started to see in the first quarter, gained momentum in our second quarter, and there are several encouraging trends that have continued to develop including increasing airline revenue and profitability, as well as improving fleet capacity and utilization rates. For the second quarter sales to commercial customers increased 27%, reflecting strengthening demand for after-market parts support and heavy maintenance services. The sales growth also reflects execution on MRO and engineering services contract award wins announced over the past 12 months as well as sales from investments made to support our airline customers.

As discussed in the second quarter earnings release, after a thorough analysis, we've decided to divest our Amsterdam component repair facility. This unit operates in a high cost area of Europe and has lost money over the past several quarters and we expect to report the unit as a discontinued operation beginning in the third quarter of this fiscal year. The aggregate carrying value of this business is approximately $12 million and we expect to recover the full carrying value. As we move forward, we will focus on building relationships with strategic partners as we look to reboot our component repair compatibilities in Europe.

Sales to government and defense customers increased 46% compared to last year and represented 51% of total sales. The sales increase principally reflects the impact of our airlift services unit and the KC10 supply program. We have now owned the airlift services business for a little over two full quarters and are very pleased with its financial performance. During the quarter, we announced a major contract win under the US Transportation Command's latest long term multi-billion dollar ID/IQ contract for a rotary wing airlift in Afghanistan. The task order has a one year initial term with four one-year renewal options and is valued at approximately $450 million over the five year term. To support this new program we will be acquiring two new super-heavy S-92 rotary wing aircraft from Sikorsky and have added four heavy lift Sikorsky S-61. Revenue from this program will commence in our third quarter and be fully ramped up in the first quarter of fiscal 2012.

Our new management team has made good progress on operational improvements with more room to go in our airlift business. We have begun the rebranding process which will kick into high gear when we relocate the business to Florida. The relocation process will begin shortly and we expect to complete the move by the end of March 2011. We received partial relocations systems from the state of Florida and expect to incur approximately $3 million to $4 million of net relocation expenses, the majority of which we expect will hit in our fourth quarter. Further, we expect our annual rent expense to decline by approximately $750,000 per year once we are fully moved into the new space. We are confident this relocation and rebranding will allow us to more effectively market this business.

I'm also very pleased that Peter Pace agreed to join our Board, as I believe he brings a unique perspective to our defense business and our international effort. Our operating margin in the second quarter increased to 7.5% of sales, up from 6.8% of sales in the first quarter. The improving commercial environment, progress on increased aircraft utilization in our airlift business, results from lean initiatives, and maintaining discipline around our cost structure, all should contribute to improving margin performance going forward.

I would now like to hand the call over to Rick Poulton, who will provide further details on our financial performance during the quarter.

Thanks, David, and good morning, everyone. As has become customary on this call, I'd like to provide a little more detail on the performance in each of our operating segments and then I will wrap up with some general comments around interest, depreciation and CapEx information.

Within our supply chain segment, sales increased 15% compared to the year ago period, and 9% on a sequential basis. The strong sales growth was driven principally by increased demand for after market parts in our commercial parts trading businesses. It's very encouraging to see sales growth at our parts businesses, as we believe it's a good indicator that airlines are beginning to invest in their aircraft again and replenish their inventory stock levels. During the period gross profit margins were under pressure in supply chain due to product mix which included increased sales from lower margin consignment programs as well as weak performance at our Amsterdam component repair facility. As David indicated earlier, though, we believe these gross margins will improve throughout the balance of the year.

We had some very good news in our Supply Chain segment earlier this week. We were notified that we, along with a partner, will be awarded a new multi-year commercial supply chain program supporting latest generation 70 and 90 seat Embraer regional jets. We expect to commence operations for this program in our fourth quarter. Finally, within our supply chain segment, we did sell an interest in one of our joint venture aircraft. At November 30, we have 29 commercial aircraft, five of which are wholly owned and 24 are owned through these joint ventures. We have successfully extended all remaining leases for aircraft that were scheduled to expire in fiscal '11, and we have done this at comparable lease rates.

In our Government and Defense Services segment we had a meaningful sales increase compared to the second quarter of last year, reflecting the inclusion of approximately $65 million in sales at our airlift services unit. As David indicated earlier, during the third quarter, we will begin deployment of additional aircraft related to the new airlift contract which, once fully operational in our first quarter of fiscal '12, will add approximately $90 million in annual revenue. The gross profit margins in our government and defense services segment were 18% in the second quarter, which was up slightly from 17.8% in the first quarter. We expect to build on this improvement in the gross profit margin as we improve aircraft utilization, as well as improve efficiencies at our KC10 supply program.

In our MRO segment sales increased 38% over the prior year and 29% on a sequential basis as we won new business, increased deliveries against our engineering services contract, and saw growth at our landing gear center. Gross margins in the segment were unfavorably impacted in the second quarter due to startup costs associated with two new heavy maintenance programs that we began at our Indianapolis facility. Collectively we currently have 50 aircraft in work across our airframe facilities and we expect margin improvement as the year progresses. On Tuesday of this week, we were notified by a North American carrier that we'll be awarded one line of heavy maintenance work at our Indianapolis facility, and this will be worth approximately $10 million on an annual basis. The relationship has the potential to grow to four lines and further diversify the customer base in Indianapolis as we currently do not perform heavy overhaul work for this carrier.

In our Structures and Systems segment sales were down slightly on a sequential basis. However our gross profit percentage improved to 18.7% which is up from 18% in the first quarter. As we look ahead to the third quarter in this segment we expect sales to approximate second quarter levels. Longer term, however, our focus is to build more balance within this portfolio business. We possess excellent precision machining, composite structure, and cargo systems manufacturing capabilities, and we're looking to grow our tier one supplier business, similar to what we have done with the A400M cargo system. We are optimistic that we will be back to a growth pattern in this segment in fiscal 2012.

Moving then down to beyond the segments, as I said, I will talk a little bit about interest cost and CapEx as well. On the cost side, SG&A as a percent of sales for the second quarter was 9.7% and that compares to 11.4% last year as well as 10.4% in the first quarter of fiscal 2011. This quarter's SG&A included approximately $1 million of severance costs at our Amsterdam facility. So we're quite pleased with our progress on leveraging our SG&A costs. Net interest expense for the quarter was $7.5 million, an increase of $1.3 million over last year's period. The cash component of this interest expense was $4.4 million and that compares to $3.3 million last year, and our noncash portion which relates to the accretion on our convertible bonds was $3.1 million, and that compares to $2.9 million last year.

Cash flow from operations for the period was strong at $22.6 million. And our depreciation and amortization for the quarter was $14.4 million. Finally CapEx for the second quarter was approximately $23 million and includes a $19 million investment in new aircraft at our airlift services business to support the new contract. As a result of the new contract in aggregate we have increased our CapEx plan for the year by $50 million and so now expect a net CapEx expenditure of $110 million for the year.

That wraps up our prepared remarks for the second quarter. I'd like to thank you for joining us on the call. Now we will open it up for any questions.

Thank you. (Operator Instructions). Our first question comes from Troy Lahr from Stifel Nicolaus.

Thanks. I'm wondering if you can talk a little bit about the consignment work mix at Supply Chain. How much was the margin impact associated with that versus some of the other moving pieces, and is that consignment work going to continue to ramp up?

We really, Troy, like the opportunity we have around consignments. It does have, I'd say, a modest impact on gross margin, but obviously from a return on capital perspective, it's very favorable. It's a wonderful way for us to support our customers, to participate in high quality assets without taking significant asset risks. The margin profile obviously is a little bit lower because we don't have the capital risk. We are looking for more consignment type programs with a variety of different parties, and as I said, we think it's good business.

How should we think about the margin profile at aviation Supply Chain as you do more consignment work? Can you still get in the 18%, 19% range, or would that be a little more challenging if consignment mix is heavy?

If you look historically at the margins in Supply Chain, there's more volatility in that segment in margins than really the rest of the business over a longer period of time. And it's just because of the mix of business. I don't think that the consignments necessarily are going to have a permanent negative impact on margins. I think you'll continue to see some level of volatility in margins in that segment.

Okay. And then if I look at MRO, I think you had some of the start up costs that you talked about, does that continue into the third quarter as more work comes through, or is this just a one-off issue? And the work that you announced today, could you give us a little more clarity? Is that just a legacy carrier, a low cost carrier, or some regional player?

It's none of those. But going to your first question, we expect the start up costs associated with the new aircraft and customers we inducted in the quarter to be completed. So, the negative margin impact related to training and ramp up and efficiencies, the benefit of the margin will come through in Q3. And then there will be some investment to support the new customer.

Okay. So the new customer, just so I'm clear, it's not a legacy carrier, it's not a low cost carrier, it's not a regional carrier?

What do you think you're missing?

I don't know, that's what I'm struggling with. Like a leasing company?

A freight carrier.

Okay, great, thanks.

Our next question comes from Larry Solow from CJS Securities.

Good morning, guys. Just on the margin question and the consignment, would you say outside of the consignment sales, generally speaking, is mix starting to improve? Because I thought you guys had sort of signaled that you are seeing an improvement in mix in aviation supply?

Let me inject here, if I may, Larry. This is David. I think what Tim is alluding to is that, a portion of that business which has a transaction orientation, and we are seeing an increase in transactions. We had some transactions in this period that had lower margins than we'd like to see. But yet they had good cash flow implications, and good customer service implications. So we went ahead and executed against those opportunities.

I think moving forward, I think what you are going to see is, you are going to see gradual marginal improvement in that business. We had a surge, if you will, in sales this period, which we believe will continue. We've had an opportunity here. We've been talking about recovery in the commercial markets here for some time. I believe in this period you started to see some of what we expected early in the calendar year, based on the flow of action in the business. I would expect that to continue at this point. And I believe the margins will strengthen as the volumes start increasing here.

Now, the consignment piece, as Tim indicated, is good business. Basically, we're not consuming our capital, and we are getting all the benefits of having access to the inventory without the risk of ownership, let's say. So, for that, we take a little lower margin. Now, the implications of that are, obviously you have some margin implication. But I still believe -- we still have a significant investment in our inventory, and we continue to see opportunities aside from consignments that allow us to go ahead and get more historical margin.

That's very helpful.

Larry, I want to just append to it because it really relates to Troy's questions here. The other thing I don't want you to lose sight of is the Amsterdam piece of what we've discussed. Don't just corollate the margin performance to consignment. That's not the message. As Amsterdam goes away, you will see some improvement to margin.

I imagine the loss in Amsterdam you took this quarter, the charges, some of it came through in SG&A and severance. But some of that also, I imagine, impacting gross margin.

Absolutely.

Right, and then just for housekeeping, just to try to figure out the true organic growth, how much did the sale of the aircraft generated some revenue in there, I imagine, in sales?

No. The aircraft transaction was a aircraft that was owned through a joint venture.

It did not come through on the sales line.

Correct.

So that 27% commercial growth, essentially that's a true organic number?

That's correct.

In the MRO, the actual sequential improvement was pretty dramatic. Was there any sort of pent-up demand, or was there some delivery of engineering orders that drove this number a little bit higher? Maybe it backs off a little bit sequentially? Any thoughts on that?

We are starting to deliver on some engineering services contracts, but the growth is really broad based. We had increased revenues at all four of our MRO facilities, and strength in engineering services.

Can you give us an update on Indy and the hangars that are currently being occupied?

All of the hangars have aircraft in them today, Larry. That doesn't mean we are at capacity, because there are ways to load more man hours into those hangars. But all of the hangars are under lease.

Just lastly, you guys had talked a good amount at the Analyst Date about new contract with Spirit Air. Any update on that?

It's progressing. We've had some relatively small wins, but we're progressing in our dialogue with them, and hopefully we'll make some progress here in the next few months.

Thank you very much.

Our next question comes from Ken Herbert from Wedbush.

Yes, hi, good morning. First question, on AWS, again, a few months ago you were talking about the potential for a fixed wing contract in fiscal 2011 to add to the business above the recent, obviously, rotary-wing contract you won. Can you provide any update on that, and where the negotiations maybe stand or the timing that you're looking for?

These are not negotiations, these are responding to bids. There was a bid recently that we did not procure, that we were not victorious on any of the aircraft. But we anticipate that as the year progresses, there will be some more fixed wing opportunities, as well.

Okay, so it looks like there is still some incremental upside from new contracts within AWS in this fiscal year?

I believe there's the upside for wins. I'm not certain how much more we will be able to go ahead and actually execute against in the balance of the fiscal year, because we have our hands full right now with the six helicopters that go into service, and the relocation. And we have some traction on more mod work opportunities that we're exploring. I think if you look at the order backlog that we have, I think it's pretty appealing, pretty attractive. I'm not certain that we will be looking to add much more on to that between now and May 31. But you should know that there are still significant opportunities out there for additional growth.

Okay. And shifting to, another question on MRO, obviously surprising strength in the quarter. You talk about the one contract you just won for the one additional line for the freight carrier. What would be a timing as you look at potentially expanding the lines on that? You mentioned up to four potentially. What would be the timing of the potential expansion of that work?

As the calendar year moves along, so the induction of this aircraft is scheduled for January 20. And I would imagine that as the year progresses, and we'll be judged on how we perform on the maintenance on this first aircraft, I believe that, assuming that we execute in the way that we're capable of, I would anticipate a few months after that, we'd be awarded the balance of the aircraft.

Okay, and just finally then on MRO, it sounds like with the growth, you continue to take market share, or as, obviously, airlines continue to outsource more, can you comment on, if you're seeing anything in terms of planes coming out of the desert, and any demand from capacity additions through either planes coming out of the desert, or obviously older planes flying more as part of a driver of the growth?

There's a couple of aircraft coming out of the desert. We've seen some of that taking place. But I think mostly it's about utilization. There is some fleet growth with some of our customers. Southwest, I believe, will be taking on some additional aircraft, and they have additional maintenance requirements this calendar year. It's a mix.

Very good, thank you very much.

Our next question comes from JB Groh from DA Davidson.

Good morning. Congratulations on the quarter. Most of my questions have been answered, but can you remind us of your seasonality in those commercial businesses, like Supply Chain and MROs? It looks like the last couple of years, Q3 has been sequentially down, maybe just address that.

Q3 is, by definition, our shortest quarter. You have the holidays, obviously, and then you have the month of February, which somebody figured out February should have less days, and that's part of this quarter. So, we see some of that in this quarter. So there has been seasonality to our business.

And then I think you gave a revenue number on Amsterdam, didn't you?

Yes.

Remind me.

I think $6.5 million.

Okay. You mentioned some initiatives in Structures and Systems that diversify. Can you maybe give us a little more detail on that?

We have a very strong and capable precision machining business, as well as a composite development business. And to date, we've not seen the kind of revenues that we are hoping to see come from those businesses. Our leadership team, led by Terry Stinson, is aggressively pursuing ways to go ahead and expand the sales penetration on some identified targeted customers. We have had some traction, and we anticipate as the year progresses, we'll have more success along these lines, as well. That, in essence, will give us a little bit more balance to our manufacturing capability, and our Structures capability, which today is heavily dependent on our mobility business.

All that being said, our mobility business is meeting its plan, slightly exceeding. We had last fiscal year, a tremendous year in that business. We have a high level of confidence that the business will continue to perform well, and contribute very profitably to our business mix. So that being said, we, together with the leadership of that group of businesses, would like to achieve more balance, and see more business coming through our precision machining and composite capability.

When you say, identified opportunities, could I assume that's in something like commercial aerospace or other industries?

Well, all aerospace related. So, mostly commercial aerospace. There are some defense opportunities as well that we're pursuing.

Okay, thanks for your time, and congratulations on the quarter, and nice Board addition.

Our next question comes from Jon Braatz from Kansas City Capital.

Good morning, everyone. Rick, you broke out a little bit of data on the Amsterdam operation. I'm just curious, when you go back and report it as a discontinued operation over the fist half and last year, what might we see on the bottom line?

Meaning?

The earnings contribution, or lack thereof.

For Amsterdam?

Yes.

Well, I think, as we said in our release, Jon, this quarter we had a $2 million pretax loss at Amsterdam. This quarter was a little uglier that what we would probably typically see, and part of that is because we recognized some severance for some early downsizing efforts we were starting to do there. But I think you can expect that, when you annualize it, you're going to have a number somewhere around $5 million to $8 million of pretax losses, probably.

Okay, thanks. I think you also mentioned that you signed a new contract with Embraer, which begins, I believe, in fourth quarter. Any data you can give us on the size of that new contract?

Let me clarify, first. We're not signing a contract with Embraer, we are signing a contract, along with a partner we're signing a contract with a major air carrier to support their fleet of Embraer 70 and 90 seat jets. And I think, Jon, it's a meaningful contract. We're particularly excited because it's a commercial side contract that breaks through into a new platform that we haven't previously supported. But I think after we sign, actually ink the contract, then maybe we will say more about the size of it.

Very good. Lastly, I think David mentioned this, if I heard correctly, all the planes whose leases were coming up for renewal in 2011, have been released at similar rates, did I hear that correctly?

Yes, and let me just add a couple of clarifying comments. We had entered the year with either seven or eight aircraft that were scheduled to have their leases come up for renewal this year. We had, I think, commented on previous calls, or at least last quarter's call, how a couple of those aircraft we had sent for disassembly, so we had dealt with a couple. But the message now is, with this last quarter, we've dealt with all of those aircraft, so we no longer have any fiscal 2011 expirations that we have to deal with. And yes, these were all re-leased, and they were re-leased at comparable rates. So, we were happy that we didn't take any real steps backward with respect to those economics.

Okay, great, thank you very much, Rick.

Our next question comes from Eric Hugel from Stephens.

Good morning, guys. With your CapEx number, $110 million for this year, should we take that as maybe an acceleration of maybe what you were thinking that you would have to spend next year into this year? Or are you seeing incremental opportunities? You had given us a number for six helicopters at your Investor Day for this new program, and I believe, if memory serves me correctly, because you weren't sure of the timing, you had some of that in this year and some of that in next year. Are you guys looking at buying more helicopters than the six, or is it still just the six and just a timing shift?

The latter Eric, it's just the six. We're not out speculating on equipment, hoping that we'll put them under contract. So, we won these contract awards. We're acquiring the assets to fulfill those contracts. And yes, to your point, at our Investor Day we were still negotiating what the payment structure might look like for those aircraft. I wasn't sure if some of that would slide out of the fiscal year. But I'm now expecting all of that to be by the end of the year.

Okay, fair enough. Can you maybe give us the breakout of how much of an impact to your gross margins was Amsterdam to ASA?

It was 50 basis points on our operating margin.

Right, but in terms of gross profit margin.

Why don't you let us get back to you on that.

We can get back, Eric, but I think you can do the math, too. Based on the data we've done. We've told you it is a $2 million operating loss, and we recognized almost, just a little under a $1 million of severance, which would have been an SG&A line.

The rest would have been in gross margin?

Yes.

Okay, fair enough, I can do the math there. In the ASC business, I know you talked about the mix on the consignment and stuff like that, but were there any write downs associated with any of the programs, maybe particularly Mesa, inventory valuation, takedowns that were hit in the quarter?

No, no write downs. Mesa continues to execute their restructuring plan. We didn't take any writedowns, Eric, and we don't have anything hanging out there that we think is imminent either.

Fair enough. With this ERJ7090 deal, is there going to be -- like what happened what you saw with Mesa and some of these other programs, is there going to be a substantial up-front inventory investment? Are you going to be buying a ton of inventory to support these aircraft up front?

No, it's going to look more like our Jazz aircraft support contract, which is much lighter up-front investment. We'll rely a lot more on the inventory the carrier already owns.

Okay, so more managing it than owning it?

Yes.

Can you update us on where we are in terms of the profitability curve on the KC10? I know there have been some profit challenges on that program over the last couple of quarters. But it's been moving in the right direction. Where do we stand, and when should we be expecting to get to a full, high single digit operating profit level?

We are making good progress on the program, Eric. We're getting through some of the up-front issues that we encountered. We do expect our financial performance to improve in the upcoming quarter, and then to continue to improve after that. I would say that, we should be where we expected to be, going into Q1 of next fiscal year.

Fair enough. Lastly, can you guys remind me, maybe my memory of this is a bit dated, but one of the revenue shortfalls for this year versus last year on the Structures and Systems, was this FMTV contract that you guys did. High volume, and also the delay in the award between BAE and Oshkosh. And I believe my understanding was, that contract was supposed to start up again in the back half of the year, but at maybe a lower revenue run rate. Is that still the timing? And are we going to see a bit of a bump up in the revenue in the back half of the year from this program, if that's the case?

No, we're not. The bridge contract from BAE is over. And we are delivering units for Oshkosh, and so for the balance of this fiscal year, we won't see any increases in revenue off of this base. However, we are encouraged by some of the things that we're hearing in terms of additional requirements going into our next fiscal year early.

Okay, so it was a smoother transition than you guys were initially expecting?

Yes, the BAE bridge contract did help smooth it out, yes.

Okay, great, thanks a lot, guys, and good quarter.

Our next question comes from Stan Mann from Mann Family Investments.

Good job, gentlemen. Several questions, primarily operating margin, David. You mentioned in the write up that you're moving towards your 10% goal. It seems to me in doing some calculations with the Amsterdam shut down and add on, that your movement toward 10% could be quicker than some of us expect. Can you talk a little bit to your ballpark expectations going to 10%?

Stan, I believe you will see continual improvement along the margin trail. If you look at this period, if you take Amsterdam into account, the operating margins are right around the 8% level, and some of the other initiatives that we have going on at the Company would lead us to steady improvement, let's say, on a quarter over quarter basis. Obviously, that rate of improvement will slow down as we get closer to 10%, but I think you should continue to see gradual steps towards that 10% level.

Okay, could you give us a picture of the converts, your debt on converts -- conversion price, timing, and whether there's anything in possible buyback next year?

Sure, Stan. At a real high level, we have three different tranches of convertible bonds. The first was a series that we have about $120 million of face value still outstanding on, has a put call date in February of 2013. So, still a couple of years out there. The conversion price on that is $29.40 something cents, somewhere in that range. And that bond bears coupon at 1.75%. As David says, just to remind everybody, the shares that that might convert into are already reflected in our fully diluted EPS. So if in fact that does convert, you won't see any incremental dilution off of that.

The other balances, we have two other series, one that has a mature date in 2014. We have the face amount of that is right around $80 million, I think we're down to? So it's closer to $100 million on discount. I'm sorry I don't have that in front of me right now, Stan. But anyway, that's 2014, and then our final series is in 2016. All-in, the face of our convertible bonds is close to $400 million.

What conversion on the last two?

The last two, we have an effective conversion price in the mid $40s. We had the bond itself converts at $35.57, but we had put a, what's called a bond hedge around that, so effectively increased the conversion price, and it's into the mid $40s.

And neither of those are in the current dilution?

Those two tranches are not in the current dilution, right.

Great, thank you.

Our next question comes from Jim Altschul from Aviation Advisory.

You mentioned that you entered into new lease agreements for all the planes that were scheduled to come off lease in your leasing portfolio this year. But as of the Investor Day, you had a couple of planes that were off lease, and you mentioned that you were in various stages in negotiations to sign new leases on them. Has that happened? Have those planes been put back on lease?

We have two aircraft that have not been put back on lease, that were not leases that had expired coming into the year. What Rick had referred to earlier were the leases that had expiration dates this year. Those were aircraft that we had basically repossessed from a carrier about a year ago or so. Those aircraft, we are still in negotiations to place those aircraft.

Okay, thank you very much.

Our next question comes from Tom Lewis from High Road Value.

Good morning. First question, with respect to Amsterdam, is there any way you can characterize for us the extent to which the work you were doing there was in support of long term contracts? And also the extent to which some of that work might find its way to other -- might be done by other AAR operations?

There's a portion of that business, Tom, that's inter-company activity that will be transferred to AAR businesses. There's a portion of the business that we expect to continue to operate for the customers in Amsterdam. So there is a few different paths that we go with Amsterdam. One of which is to sell the business. There is some interest in buying the business, in which case those contracts obviously would stay with the business.

So you're saying that, even though this has been a difficult place for you to make money, you already have some indications of interest in buying the operation?

Yes, there are other companies that look at some of this business, and see ways for synergies that make investment in this business worth their while.

Good. And when you acquired AWS, I recall that some of the aircraft that came with that were surplus to the contracts that you had or anticipated. Is there anything you can tell us about the degree to which you sold some of those aircraft, or learned about the marketability of those kinds of aircraft?

Tom, we have been actively marketing them. We have had expressions of interest around several of the aircraft. Nothing firm yet, but expression of interest, and potential buyer's in the process of doing diligence and reviewing paperwork. And then several of the aircraft we've actually began to disassemble for parts. We see a reasonably strong parts market for some of this. We have been active on it, and our hope is, our expectation is before the year is out, we will turn some of that into cash.

Okay, and it's interesting that you're seeing parts demand there, as well as probably use some of those parts. Finally, is there anything that we've learned since the last call or so about the timing, the prospective timing of being able to recommence work on A400M?

We continue to do work on the A400M. The issue is really a function of the Airbus folks getting the aircraft ready for delivery to their customers. They've published some dates on that. We are looking for deliveries to begin in calendar 2012, and then continuing where they get to a peak level in 2016.

Okay, great, keep up the great work, guys.

We do have a follow-up from Troy Lahr from Stifel Nicholas.

Thanks. Just wanted to drill down on the margins in Structures and Systems. You've been improving the margins sequentially. Should we think about margins stabilizing in that 18.5% range? Might that be the floor going forward?

The margins in Structures and Systems, the change there is really directly related to the change in our mobility business. And as I said earlier, I think for the balance of the fiscal year at Structures and Systems, you're going to see approximately the same level of performance.

Okay, that's helpful. And how should we think about SG&A going forward? Again, it declined pretty significantly, should we think about 9.5% as a new run rate for SG&A? Or 9.5% to 10%, something like that?

Troy, that's certainly our goal. As we keep the sales levels up high, I think that makes that goal a lot more achievable. But we've had a goal of being below 10%. We're happy we're there. Nothing unusual happened to bring that rate down this quarter. In fact, as we said, there was some severance book that we shouldn't have to repeat. So I think we feel pretty good about that level.

Okay, thanks. And then, I think at your Investor Day, you talked about some work from Spirit AeroSystem offloading some of that work. Has there been any progress made on that?

David commented on that earlier, Troy. We made some progress. We've gotten some small orders from them. But the general pace of discussions and ramp up or relationship with them is as expected. It's not going to happen overnight, but we are happy with the progression we're making there.

Okay, and then lastly, MRO, I think earlier you were talking about some seasonality in the third quarter. Even excluding that, with all the business that you have ramping up, is that about a $100 million a quarter business now? Or is it really going to be fluctuating, and move around quite a bit?

That's about the size of the business now.

And that should stay, even with the seasonality, quarter over quarter, we should start seeing that more of $100 million?

The real struggle for that business is in the summer months, when whole fleets come out of maintenance. But for the balance of this fiscal year, that is about right.

Okay, thanks, perfect, guys.

Our next follow-up comes from Larry Solow from CJS Securities.

In terms of AWS, is there any real seasonality? I imagine there's some fluctuations just on efficiencies and what-not, and how many lifts you get. But is it simple enough to just say that you did $65 million this quarter, so that's like an annual run rate of $260 million, and you add the $90 million new contract, and you're close to a $350 million run rate? Is that a ball park?

Yes, I think that's probably. We haven't had the business for a full year yet. So, we haven't had a chance to fully understand the ebbs and flows. But I would think that's not a bad way to look at it at this point.

That might be a little bit on the high end. That might be a little bit higher than our expectation. There was some mod work business that's not duplicable, that comes out. I wouldn't be modeling it that high. I'd probably be thinking of maybe the run rate that you just referred to, and maybe add on another $15 million a quarter approximately.

Okay, and then I don't think there was any, but were there any -- you didn't repurchase any of your converts this quarter, or shares, right?

No, we didn't.

Okay, and then just last question, on the CapEx, Rick, the $110 million, does that include basically all of the six aircraft you had to purchase, or will purchase? So, assuming you don't expand with AWS, which would obviously be a high class problem anyhow, but is it fair to assume that your CapEx in fiscal 2012 will drop back down towards -- well, it had been running around $30 million, maybe it's a little higher than that now, but is it fair to assume it will --?

That's right, Larry. Somewhere in that $35 million to maybe $40 million. But yes.

Excellent, thanks, guys.

Our next follow-up comes from Eric Hugel from Stephens.

With regards to the AWS business, I remember at the Investor Day, one of the things that we were talking about was the potential there for getting that business back into, to be able to compete for Iraqi contracts. Can you maybe give us some update? Have you been making progress there? And maybe just an update on the list, the pipeline of opportunities there the rest of the year, over the next year, what you guys feel, if there are any big opportunities out there?

Eric, let me address the question on Iraq. We are aggressively pursuing the Iraq business. There is a process, if you will. We're working right now with the State Department centric opportunity, and we're working that, as I indicated, fairly aggressively. I believe the rebranding exercise that we're going through will go a long way to reinstituting those opportunities. So, we have begun the relocation process, and we will begin the rebranding with the name AAR Airlift beginning January 1.

So, I would anticipate that once we're off of the Blackwater property, and fully operational down in Melbourne, Florida, with our new name, that our visibility with the State Department will improve, or our standing with the State Department will improve dramatically, and lead us to being back as a qualified bidder, if you will. They are very aware of who we are, what we're doing. They are very aware of our new leadership team. We have visited with the State Department on numerous occasions, including myself, and we have been received very favorably. I think it's just a matter of time, quite frankly.

In terms of opportunities aside, in addition to Iraq and Afghanistan, we are pursuing numerous opportunities. I think we're trying to prioritize, though, all the different work streams that we have, and the focus today is around putting the new aircraft into service over in Afghanistan, moving on with relocation, and getting established in Melbourne. We're very focused on the mod business, and getting revenue streams coming back on the mod business. We're tackling that business from a lot of different dimensions, and we feel very good about where we're at in relationship to where we were when we acquired this business on April 7.

If you were successful in getting the State Department, getting back in the fold with the State Department, my understanding, a lot of the helicopters that you acquired that are parked right now were formerly in Iraq, and I believe they were under a State Department contract. If you were successful in getting back into the State Department, is it likely that you would be able to utilize these assets that you already have? In other words, be able to get the business without having to make a major capital investment?

I believe, if we're talking purely about Iraq, yes. At this moment, we are engaged in discussions with folks to sell some of those parked assets. But assuming that the assets are still under our control at the time that we would be awarded some work, many of those assets would be deployable.

Great, thanks a lot, guys.

(Operator Instructions). I am not showing any questions at this time.

Okay, thank you very much for your participation today.

Ladies and gentlemen, this does conclude today's program. You may now disconnect, and have a wonderful day.