AAR Corp (AIR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AAR Corporation first quarter fiscal 2012 earnings conference call. At this time all participants are in 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, today's conference is being recorded.

I would now like to turn the conference to your host, Mr. Greg Dellinger.

Thank you, Amy. Good morning, ladies and gentlemen, and thank you for joining our first quarter fiscal year 2012 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, 2011 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.

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; Rick Poulton, our Chief Financial Officer.

We reported first-quarter fiscal year 2012 results yesterday afternoon. I hope that you have had a chance to review our press release. Sales for the first quarter were $479.3 million, up 19% compared to the same period a year ago and income from continuing operations was $17 million or $0.41 per diluted share. Overall, we saw strong sales growth to our commercial customer base and steady performance in our defense businesses.

Our consolidated margins were below expectations as we did not see the full benefit from the strong sales performance which Rick will address in more detail in his comments. We do expect margin improvement as the year progresses and we will provide more color at our Investor Day on October 5.

For the quarter, we reported commercial sales growth of 40% driven by strength in our parts supply businesses which reported their highest quarterly sales over the last 10 years and higher sales in our MRO segment. During the period we also sold two aircraft from our aircraft portfolio at acceptable yields. You may recall that we discussed the impending sale of these aircraft on a conference call in July. Excluding the sale of these two aircraft, commercial sales growth for the first quarter was still a healthy 21%.

In late June, we announced the new GE Unison distribution agreement. This is an exclusive agreement that is expected to generate approximately $600 million in revenue over its 10-year term. During the first quarter, sales from the Unison program were less than $1 million and we expect a gradual ramp-up in monthly revenue as the year progresses and as the stocking position of other distributors runs off.

We announced new business with Virgin America to perform heavy maintenance and onboard entertainment installation services for their growing fleet of Airbus A320 series aircraft. This work began in August and is expected to be performed over an 18-month period.

We were also awarded a contract from a large regional carrier to perform maintenance on their fleet of aircraft. This work commenced late in our first quarter and will ramp up through fiscal 2012.

In Government and Defense Services, I am pleased with the progress and integration at our AAR Airlift businesses. We have completed the relocation and challenged the leadership with extracting additional cost efficiencies now that the move is behind us. In addition, the FAA's announcement on a Navy contract, we also were renewed on the bulk of our fixed and rotary wing aircraft contracts supporting operations in Afghanistan on top of additional fixed wing wins.

Although sales were soft at our mobility business, we expect to see a nice pickup in activity in our second quarter and then expect continued sequential sales growth during the year as we increase production and delivery on a couple of programs.

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

Thank you, Dave, and good morning, everyone. In keeping with tradition, I would like to provide a little more detail on the performance in each of our operating segments and then I will conclude with some comments around interest, depreciation and CapEx.

Within our supply chain segment, sales increased 54% compared to the year-ago period and this included the sale of the two aircraft that David referred to. Excluding the sale of these two aircraft, sales in supply chain increased 21% year-over-year and were up significantly on a sequential basis as well. This was largely on the backs of our parts trading and supply businesses, which as David indicated, had their strongest quarter in the last 10 years.

The gross profit margin for our supply chain segment was a reported 16.3%. However, excluding the sale of the two aircraft, the gross profit margin was 18.8%. While this is essentially unchanged from a year-ago period, this is up more than 150 basis points from the gross margins we have seen in this segment over the last three quarters.

With the sale of the two aircraft, our lease portfolio now stand at 26 aircraft, four of which are owned outright and 22 are partially owned through joint ventures. We currently have four additional aircraft under signed LOIs to sell and expect to close on those aircraft during the second and third quarters of fiscal 2012.

In our Government and Defense Services segment, sales increased by 16% driven by growth at AAR Airlift and at our defense logistics business. Gross profit margin for this segment was 18.3%, up from 17.8% last year and largely consistent with the mid-18s average we have experienced throughout all of last year.

The results of the contract renewals at Airlift reaffirmed all but six of the aircraft in our operating fleet for the remainder of our fiscal year and these six aircraft are linked to an option that is exercisable by the customer on December 1. Preliminary indications from the customer are that this option will be exercised so we feel very good about the expected contributions from our airlift fleet for the balance of the year.

In the MRO segment, sales increased 21% over the prior year. As you know, the first quarter for our MRO business historically has been soft due to the heavy flying summer season by the airlines. The stronger-than-expected sales growth was in part due to our decision to protect the workforce by accepting lower margin drop in work. We protected the workforce in anticipation of some of the growth we expect for the rest of the year.

The gross profit margin in the MRO segment was 11% in the first quarter compared to 13.2% in the year-ago period. This reduction was due to the lower margin work I just mentioned as well as training costs associated with preparing to induct a new customer that David referred to earlier.

As we look ahead, we expect margins in MRO to improve in Q2 and remain in a more customary range around 14% to 15% for the balance of the year.

Finally in our Structures and Systems segment, sales were down 17% year-over-year, primarily due to the lower volumes at our mobility products unit. And our gross profit margin declined to 14.6% due to this lower sales activity.

Sales in this segment will ramp up significantly through the remainder of the year and we expect full-year sales to exceed last year's levels. We also expect gross profit margins to return to the mid to high teens level over the next few quarters as volume at our mobility unit increases.

SG&A as a percent of sales was 8.7% in the first quarter and that compared to 10.2% in the same period last year. If we exclude the sale of the aircraft, SG&A as a percent of sales was 9.4%, representing continued good leverage of our existing cost structure.

Our net interest expense for the quarter was $7.4 million, an increase of just $0.1 million from last year. The cash component of this interest was $4.2 million and a non-cash portion related to amortization from our convertible bonds was $3.2 million.

Depreciation and amortization for the quarter was $16.7 million and CapEx for the first quarter was approximately $42 million. As we previously indicated we have paid for $21 million for an S-92 that we had deployed at the end of last year. Our CapEx plan for the full year is still expected around $75 million.

That wraps up our prepared remarks for the first-quarter performance. I do want to mention that we will be hosting our investor conference on October 5 and we look forward to providing more information to you there.

And, operator, we will open up for any questions now.

(Operator Instructions). Troy Lahr, Stifel Nicolaus.

Yes, thanks. I'm wondering if you can talk a little bit more about the MRO margins, how much was seasonality? How much was some of the costs associated with the induction of the new customer?

And then if you look year-over-year when you were doing last year $77 million, you still did maybe 13% margins, so can you maybe just help me understand kind of the year-over-year impact and some of the moving pieces there?

Troy, let me just try to give a little bit more color on MRO. As Rick mentioned, the first quarter is always tough as customers don't want their aircraft in maintenance. Yet, we have a strong schedule in front of us so we need to protect the workforce.

It is exacerbated a little bit because we had a couple of mature, higher-margin programs wind down and basically replaced plus from a topline perspective with new programs that are immature from a margin perspective. We are extremely excited about the new win. You know, one in particular, a regional operator, five lines of work. It's a long-term contract and it's really very exciting. The rest of the shops are going to be busy here starting in September. The engineering services business kicks in later in the fiscal year so there is a lot of very positive things going on. It is just that this first quarter had a lot of moving pieces.

I will say also that we are positioned to add capacity for MRO if we need to. There is efficient capacity out there. So the year-over-year comparison is a little tough. I recognize that. But the outlook for the business is good. We are continuing to fill up the hangars; we are continuing to win new business. We are continuing to expand our brand and leverage our position. So as we look out, we are very positive about our performance.

Okay, thanks. Can you also help me understand the Virgin America contract? It's 18 month -- I guess why is that not longer? Do you hope that that turns into something long-term?

Yes, we have been working with Virgin for a while. It started out doing some integration work and then it has migrated to check work and we expect that -- at least there is no reason why we wouldn't be doing work for Virgin, whatever their requirements are, beyond the 18 months. I think the 18 months is limited to the current buying of maintenance that they have in their hopper.

Okay, and then just --

We expect to continue to support them.

Okay, after the 18 months?

Yes.

Okay. And then just lastly, you have booked a lot of new customers at MRO. Is the pipeline still pretty full on new work that you are chasing after or how do you view that? And do you kind of have to win it on price do you think or can you talk about that a little bit?

I think more and more -- price is always a factor, obviously, but I think our quality reputation is a differentiator. Our balance sheet is a differentiator. I would characterize the pipeline as robust and that is why I made my comment about the potential for additional capacity. So we are positioned to continue to win business, grow and expand and then most importantly, leverage that into other parts of the business.

Great. Thanks, guys.

Larry Solow, CJS Securities.

Hi, good morning, guys. Just one clarification on the sale of the two aircraft, the P&L impact, it sounds like it was about $2.5 million in gross profit and I guess that would mostly just flow to the bottom line so that would be like $0.03, $0.04? Is that about right for back of the envelope?

Your math on $2.5 million is a little high, Larry, but you are in the zip code. And, yes, there is not -- there is some incremental SG&A but it is not a lot. So it flows down to operating profit. I mean when you say bottom line, it certainly doesn't flow down (multiple speakers)

Yes, but that's what I mean. That means operating profit -- pretax (inaudible) right, okay. In the Structures and Systems, the family of the medium tactical vehicles, is that one of the contracts that has been sort of slow to ramp?

Well, the production line on that was not linear. It is ramping right now, though, so that is a big piece of -- it is not the only piece but it is certainly a big piece of our outlook when we would say we expect both sales and margins to ramp throughout the balance of the year.

Okay. And just characterizing it, it sounds like a lot of the inefficiencies are temporary and it just got exacerbated by the seasonality and the shift from sort of a busy period to a slow period. You really had no choice but to keep some of your workers. So I am not saying it is all temporary, but it seems like a good way to characterize it a lot of it is it is fairly temporary inefficiencies. Is that a fair statement, or --?

Yes, your commentary -- I am not sure if you are referring to MRO or Structures, but I would say (multiple speakers)

For both. I mean --

The theme is the same, Larry. That's right. So you were obviously listening to what we had to say. And yes, the theme is we expect sales and performance to improve in both of those key areas.

Right, just last question. Can you just sort of characterize what -- sort of the mood or the market out there on the commercial side and what you are hearing from your commercial customers in terms of -- and capacity outlook? And has anything really changed publicly or privately or what you think or anecdotally or anything you could add to that?

Hey, Larry. It's Tim. You know, what I would say is that it is robust. You saw it in our overall sales growth to commercial customers. We are seeing it on the spare parts side. We are seeing it on the program side. We are seeing it on the MRO side. So I think it is robust.

Okay, and they haven't shown any -- obviously there would be a little bit of a lag but obviously with -- who knows what happens with the economy, but has there been any even subtle change on their outlook or at least of what they -- in terms of --?

No, you read about the change. You read about some of the fleet planning that is going on. But from our perspective, we continue to talk to them about ways that we can add value and be important suppliers as they go through some of these changes that they are going through.

Okay, great. Fair enough. Thanks a lot, guys. I appreciate it.

Tyler Hojo, Sidoti & Company.

Morning, guys. First, quick question just on the -- I think you said you had letters of intent on four aircraft to sell in the third and the fourth quarter. First of all, was that correct?

Yes, four LOIs, Tyler, and we said through the second and third quarters.

Okay, I see. Second and third. Are those owned outright or in the unconsolidated joint ventures?

It's a mix. One of those four is an aircraft that we own outright, the other three are joint venture aircraft.

Okay, and just in regards to how we should think about the P&L impact. I mean is it fair to say that the profit rates would be similar on the two aircraft that you just sold in the just reported quarter?

The sales level will be significantly lower. Part of the reason we had the sales as high as we did this quarter is because of the type of aircraft. It was very large aircraft, so that is -- that will be significantly lower, single-digit millions, and we would expect the profit contribution to be a lot lower, too.

Okay, all right. Okay, that's helpful. And then just secondly, I just wanted to ask you all about the sequential increase that you are looking for in mobility products. What is it that gives you confidence that that is going to occur? Is it just that you have the backlog visibility, the orders in hand, so on and so forth? Or could you maybe just elaborate?

We have firm requirements from the customer with delivery schedules, and it continues to ramp through the fiscal year. So, we don't see significant risk to that revenue.

Hey, Tim, how long does your visibility stretch within that product line? Do you have decent visibility through the next fiscal year as well?

Through the end of this fiscal year.

Okay. Do you have any preliminary thoughts on the trajectory of that business a little bit longer-term?

I think there's conversations about -- with key customers about additional requirements. So those kind of conversations are happening, but I wouldn't characterize them as being much more then inquiries and so I couldn't say that we feel like there is significant increases or even replacement going beyond the end of the fiscal year at this point. But there are conversations.

But, Tyler, I would just like to add, the question about -- if your question is just about mobility, I think Tim has addressed that, but in terms of the segment broader, recall -- a part of our strategy there is recognizing mobility is not going to grow forever as we have been emphasizing some of the other businesses in that segment. So as our cargo system business starts to ramp up, particularly on A400M production, as we continue to build out this relationship with Spirit through our precision machining business. Just as examples, those other legs of the Structures and Systems stool will continue to rise.

Right, and since you brought up Spirit, could you maybe give us a little bit of an update in regards to how that relationship has been tracking? I know you -- I think at last year's Analyst Day you guys indicated quite a bit of opportunity on a lot of the different Boeing 7 series (multiple speakers).

I mean, so Tyler, when we talked about it a year ago, we had -- we were producing nothing and we had nothing in backlog for that relationship. A year later, while it is not impacting our current numbers in any meaningful way right now, we have $100 million of booked orders for them. Now that stretches over several years going forward, but it is indicative of the progress I think we have made in the last year and it is also indicative that the opportunity can get -- can continue to grow off of that.

Would you be able to tell us which platforms you have had success on?

It's a mix of platforms.

Mostly across the Boeing, the Boeing fleet. And you've got a mix of the different aircraft but we will get into further detail on the Spirit relationship at the October Investor Day.

Sounds great. Thanks for all the time.

Ken Herbert, Wedbush.

Hi, good morning. My first question, within Government and Defense Services, I know within the Airlift business part of the justification or area for improvement you saw when you acquired this business about a year and a half ago was in just availability of the aircraft. Could you just provide an update on sort of where that stands? And maybe through the course of this year, the positive impact that could potentially have on revenues as well as margin within this business as you obviously get the aircraft to a better rate of availability or higher percentage number?

So I think we are doing a decent job there in terms of deployment of the fleet. We continue to see opportunity for more efficiency there. We have -- as we have recently completed the move from North Carolina to Melbourne, we are now undertaking a program to bring a broad range of efficiencies to the business and fleet deployment being I guess probably the biggest opportunity, but certainly not the only opportunity.

So I guess what I would say is we are probably halfway where we think we can be when we -- where we thought we could have been when we acquired the business. So we have made some progress and we see I guess significant I would say, opportunity for additional improvements.

Okay. That's good to hear. And can you provide an update on the potential for new business within the Airlift business here throughout the rest of the fiscal year? Incremental contract wins?

You know, we have been very focused on retaining the business that we have today and digesting some of the assets that we acquired last fiscal year. And that is going to be our focus as we go forward. We are looking at opportunities that will give us a little bit more diversification, but I would say our focus is to generate cash out of the assets that we have, continue to drive for efficiencies and continue to look for a better yield out of the business.

There are some opportunities for MOD work that leverages our internal capability and we are going to continue to pursue those. As you may recall, that was a significant contributor to the performance of the business before we acquired one contract in particular. So we see opportunity there.

Ken, I would also pile on that recall the last two renewals we announced, there were some growth aircraft in those as well and those will be deployed throughout the year. So we have two fixed wing and one rotary wing growth aircraft that have already been teed up through those renewals.

Okay. No, that's helpful. Finally, on the MRO segment, I think you mentioned earlier that you expected some ramp, perhaps as we go through the year and another few quarters from the engineering segment or the engineering work and those types of contracts. And I think if I remember well, you had a significant customer last year that this business is rolling off. What is the outlook like now, assuming the commercial market still continues to remain robust and things are not too negatively impacted by what is happening on a macro level.

What is the opportunity to build up more of an engineering pipeline? Because if I remember well, that tends to be obviously much higher margin business and maybe a little more attractive from that standpoint. Can you comment on any opportunities there and what you are seeing in that landscape?

So, you're right. It's good business and we are good at it. And we need to have a broader customer base and a broader capability there. We are taking some steps to do just that. We have won some business with one particular customer. We have some opportunities, some international opportunities, but it is a focus of ours to go ahead and expand this business so that it's a four quarters business instead of the lumpiness that we have seen. But it's good, solid business and we are working on expanding it and building our franchise.

And just finally, can the revenues from that type of work be flat in fiscal 2012 over fiscal 2011, or potentially up or --?

I think that we are going to see some of the benefit in fiscal 2012 for the one major program, but I don't believe it is going to be as much as we had in fiscal 2011. I think it is going to -- the big piece is going to flip into 2013, unless there is something new that comes up.

Right.

So, Ken, just to put a little more color on that. We -- in fiscal 2011, close to 10% of the segment's revenue was from that type of activity. That is probably closer to 5%, between 5%, 6% this year based on what we see in front of us right now.

Okay, great. Thank you very much for the color. Thanks.

Eric Hugel, Stephens.

Hey, good morning, guys. Did you throw out a cash flow from operations number?

We did not provide that. It will obviously be our Q, Eric, but we will save you the drama. It is -- we use -- we did use cash this quarter and invested. It's pretty customary that in the first quarter we do some inventory buys and whatnot, but we used approximately $25 million in cash in operations during the quarter.

Were you building up inventories -- was part of that the Unison transaction?

A little bit on Unison, a little bit at our mobility business in preparation for the production ramp there. And a little bit to support what was pretty strong demand in our trading businesses.

Great. in terms of your trading businesses, you talked about strong demand I guess in the Aviation Supply Chain, good margins, nice step over up over ex the aircraft sales, a high 18%, 19% range. Is there anything there that we sort of should be cautious on going forward in terms of -- it is sort of anomalous that -- should we continue to see that kind of range if current market conditions persist?

Well, we were up, as I said, about 150 basis points, normalized, Eric, as I said. I am not -- it is hard to say we will continue that level exactly, but as we look out through the rest of the year, we would expect to be up 18% or above for the rest of the year. That is our expectation right now.

Okay. In terms of the margins on the Government and Defense Services business, can you sort of talk to us about -- last quarter it was around a little over 20%. This quarter it dropped down to 18.3%. Can you talk about sort of some of the puts and takes there from fourth quarter to first quarter? And then sort of as we go through the year, how should that evolve? Where should we be able to get to?

Yes, well the reason I characterized it, Eric, in my comments that it was a little bit better than this period last year, but largely consistent with the average for last year. Yes, as you've noted, you do have a little bit of quarterly ups and downs that can probably range about 100 basis points or so. And that has a lot to do with how much the customer is using the aircraft during the period so what the demand is and so the incremental usage we can get off of that. Sometimes it can be impacted by deployment of during a period. There is deployment related fees that happen that are kind irrespective of how much you flew it.

And some of it can just be on an availability. So if you have a really good availability quarter relative to another quarter, that can have an impact as well. So that gives you a little color on what drives some of that variability, but you're essentially, I think, plus or minus -- let's say 150 basis points in any quarter.

Okay. You are S-92 fleet, this was the first full quarter I guess in theater. Can you give us sort of an update as to how things are going there with the new fleet type?

I would say that we are still working through the integration of the aircraft. It's a new aircraft to us, it's a new aircraft to the customer and I don't think that we have actually reached maximum efficiency yet.

Let me just say if I may, Eric, that the aircraft -- the customer loves the aircraft, so you have -- it is an air-conditioned aircraft, a very comfortable interior and performs exceedingly well. During the period, there were some early technology or new technology aircraft issues around the engines and some of the major accessories and together with Sikorsky we are working through those. And we should have more deployments this quarter than we had last quarter, and hopefully as the aircraft gains a little bit more experience, Sikorsky gains a little bit more experience, and a support package that we have already -- that we -- that we have acquired from them will kick in and provide more reliability for the aircraft. But not uncommon for a new technology aircraft in a -- operating in a new theater. You have the same thing on the commercial aircraft universe as well.

Sure, no, understood. I mean is that sort of getting -- I guess through the initial teething problems with the S-92? Expected -- but should we think about that as a source of margin expansion as we go through the year?

I think as the year progresses, we should get more utilization from the aircraft and you should see better performance from those aircraft, yes.

And would you expect by year end for sort of margins to be back in sort of that -- the 20%, 21% range. Is that a reasonable sort of target?

Again, Eric, I think fourth quarter was a quarter where lots of things were going well and again the variables I talked about tended to all go in a favorable direction. I think there is upside as we have said both from getting the S-92 up its maturity curve and then also just in general with getting our aircraft fleet at a higher utilization and we have made pretty good investments in inventory spares etc. to try to support that goal.

So I think the upside lies there, but I don't think you should draw the baseline of Q4. I think we should look at the average for last year and sort of say that is the baseline on which we are going to try to improve from.

Fair enough. Lastly, in terms of the Structures and Systems segment, you talked about mobility products for this quarter, obviously not seeing the ramp up in next quarter you are going to see a $10 million to 15 million step up. Are there other parts -- what are sort of the other pieces in the Structures and Systems segment? Are there any sort of offsetting sort of impacts to that or are there maybe incremental positives to that?

I know you just recently put out an announcement on some new commercial cargo loading systems where you are going to have deliveries through this year. Sort of how should we think about that?

Yes, I mean the answer is yes, that there is upside but it's important to recognize today, mobility continues to dwarf the other businesses in that segment. If we look longer-term, we should see that impact shifting a little bit, but with mobility representing anywhere from 75% to 80% of that segment, it becomes -- it is still the major story. So yes there will be some upside in those other areas, but in terms of moving the needle, mobility has the biggest driver on that still.

Great. Thanks a lot, guys.

JB Groh, D.A. Davidson.

Good morning, guys, just got a couple -- perhaps, Rick, I know you mentioned these LOIs in Q2 and Q3. Does that mean there is a couple in Q2 and Q3 or is the timing still kind of uncertain on when those would actually close?

Well, I think the process of getting from LOI to close is inherently unpredictable sometimes, JB, so it's tough. I can tell you as written, we would expect probably all of them to be done in Q2, but I think one of the transactions or actually two of them are close to the end of the quarter, so they could slip to Q3.

But I think you said some total of these would be single-digit millions in terms of revenue impact?

Only one of those four aircraft is an owned aircraft and you only get the sales treatment off of an owned airplane. The JV -- whatever P&L impact there is from the JV aircraft will flow through the JV line on our P&L.

And the other one I had was -- there is a pretty nice downtick in SG&A and I may have missed kind of the explanation for that. Year-over-year it was down of course versus Q4. So could you help us kind of understand what is going on there and sort of what -- like a $2 million run rate or how should we think of that (inaudible) balance sheet?

Yes, well let me start -- I think we feel very good about our SG&A, JB. I want to -- I guess we wanted to be clear that in part the rate as published, which is 8.7%, does benefit a little bit from the aircraft transaction. So when we did talk about excluding those aircraft transactions and that gets you a rate of 9.4%. That compares to 9.8% for all of last year. So I think it is -- we do feel pretty good about where our SG&A, and it's not an accident we have gotten there. We have been very focused on streamlining our costs and again with the growth in the business, we are getting some nice leverage.

So, the best way to look at it is more on a percentage of sales than this absolute level?

Yes, I mean eventually as you grow, you have to back stop that with a little bit of SG&A support so I do think the ratio is important. But the way we manage it day to day is on an absolute basis for sure.

Yes, and on a year-over-year basis, we had very, very modest growth in absolute dollars spent.

Is Q1 is just normally lower I guess, right?

A little bit. That's right.

Okay, thank you.

Stan Mann, Mann Family Investors.

Hi, gentlemen. Good job. I have several questions. One, Dave, as you have stated in previous -- over the years that your goal of operating margin goal is in the 10% area. Do you still feel that that is a possibility?

Stan, it still remains our goal. We are kind of -- obviously the environment today is maybe a little bit different than it was say a year ago now in terms of the overall global economy, the commercial -- and its impact on the commercial markets and of course, defense budget spending and so on. So we will continue to move the portfolio in that direction so that the business looks like a 10% or better operating margin business.

I think -- and clearly as this year progresses, the margins will improve off of the 7% that we experienced in Q1. But what we would like to do, Stan, at the October Investor Day what we plan to do is kind of lay out our view kind of in a let's call it the balance of the fiscal year vantage point and then out into the future what our plans look like.

So yes, it is still a goal out there. Clearly this quarter we came off the progress that we had been making, but nevertheless we do believe that as the year progresses the margins will improve.

Okay. Second question you will probably say is going to be Investor Day. But are there any specific cost saving efficiency programs that you can talk about or are you saving that for the Investor Day?

No, no, no. There are ongoing efficiency drives throughout the Company. You know, I think Rick has alluded to the inefficiencies that we experienced in MRO, which is mix oriented, some of which is new customer oriented. So it is not so much that the costs necessarily will come down as much as the efficiencies will improve, and we have a similar dynamic at our mobility business. We are looking at efficiencies -- I think we have signaled as well with the move behind us with the Airlift business, we believe there may be -- the management down there believes there may be certain opportunities to drive some more efficiencies through that business as well.

So that at AAR is an ongoing part of our life and I would expect that we will continue down that path. You know, I think Rick also in talking about the SG&A levels being down at 9.4% is a pretty appealing level for the Company, so if we can sustain that through the balance of the year, I view that as a real positive.

Okay, but you will put the dollar parameters on Investor Day?

I'm not so certain that we will put more parameters around it than we have. I think we have kind of indicated that we will continue to drive those efficiencies, Stan, and I think you will just continue to see us perform in that fashion.

Okay. Last question. The use of cash in future quarters according to my calculations you are going to start generating cash. Can you talk to your usage goals? Is it pay down of debt, tuck-in acquisitions? What are you going to do with that excess cash in the future quarters?

Yes, I believe that you will be looking at both. I think you will be looking -- we are looking at a couple of different properties towards the goal of improving our operating margins and at the same token short of being able to get deals done at the right pricing levels, we will pay down debt with the cash.

We have already put in place a dividend. Obviously we will look at the dividends each quarter at the Board level and determine whether that current level is appropriate, or increases are at the end. But I think for now I would anticipate that the use of proceeds will be to look for good, strategic assets that fit our portfolio, as well as if unsuccessful in that regard then pay down debt.

Okay, but there will be excess cash in future quarters, correct?

Yes, we're expecting cash -- we are expecting good cash performance similar to what we have had in the last few years. We expect a little bit more free cash. Rick has talked about the CapEx being at $70 million. We already spent $40 million in the first, quarter, so if you look at the pace of CapEx through the balance of the year, it will be less intensive. So, therefore, that in and of itself will generate some cash.

All right. Just a last very specific question. You alluded to expanding your maintenance lines. Does that mean you are going to lease or buy some more space in Indianapolis, or one of your other maintenance locations?

I think what Tim is alluding to is that there are opportunities to expand if we so desire. We are again extremely focused around margins and the implications of margins. There is some space available in Indianapolis, but there is also a couple of very attractively priced facilities.

Keep in mind now, Indianapolis is kind of the Taj Mahal, if you will, of US domestic maintenance facilities and there are costs associated with that. So on the one hand, they are certain efficiencies to be gained by increasing our footprint there. On the other hand, there are very attractively priced facilities elsewhere throughout the country.

We are not going to move quickly in this regard. We're going to take our time, study it, look at available workforce, and make sure that as we put any new facilities to work, it will be margin accretive.

But your existing facilities, as I understand it, with what is going on are going to be full this fiscal, right?

I don't know about necessarily full, but they'll be taxed.

Taxed, okay. Thank you. Good job, gentlemen.

Thank you.

(Operator Instructions) Tom Lewis, High Road Value Research.

Yes, hi. I was wondering if you could elaborate just a little bit on your comment about a record quarter in parts trading. Specifically, I was under the impression that while maybe not as seasonal, that operation experiences some of the seasonality that MRO does. And if so, I think your record performance would be something of a strong statement. Can you elaborate on that a bit?

Yes, Tom, it was the highest sales level in our parts businesses in 10 years.

Yes.

So not necessarily record, but at least for the last 10 years. In terms of the seasonality, yes, there is some certain seasonality to it. Historically, the two strongest quarters for our parts businesses have been Q2 and Q4. So we are fairly pleased with the pace of activity in our parts businesses.

Yes. Now I would think a lot of that is just coming from the inexorably rising tide of demand driven by traffic. But it seems to me that we don't have to go back too many years to where, as I recall, that really -- we used to talk about parts trading as an untapped opportunity in a lot of the markets outside of the West, specifically Asia.

Can you speak to how much of that long-term growth has come from factors other than just the steadily rising tide like addressing these markets that really weren't there for you before?

We have been very focused on the Middle East market. We have been focused on the Asian market. We have had some success with a recently opened office in Abu Dhabi. And I would expect that over time as the world's fleet kind of moves in that direction that our parts business will follow. So to date, a very large percentage of our parts business is still US centric, also European-based but we do have footprints in Asia, Middle East. I would expect that as time moves along that you will see increased volumes coming out of those regions.

So we have gotten some recognition of the value proposition there in these markets, but it sounds like you still have miles to go?

Absolutely, correct. I believe we are not even in the first inning. We have got one man on base and that is about it. You know, I think there is a lot of runway in front of us.

Okay, great. Thanks a lot, guys.

Eric Hugel, Stephens.

Hey, thanks. Rick, just real quick, looking at the EPS calculation, something new sort of popped up in there, the income attributable to participating shares. What is that related to? It was about $0.5 million and is that sort of something that just goes forward?

Yes, Eric, it's unfortunately, it's sort of arcane GAAP requirements on -- now that we have launched our dividend, it flows from the fact that we started paying a dividend and we have to attribute income to restricted stock shares that -- differently from the shares that are outstanding today. And so if you really want to get into it in any deeper way, I would suggest maybe off-line, but it's -- just let's leave it at that. It is a GAAP driven requirement that is all a function of the fact that we launched a dividend, and --

But going forward, that should be about $0.5 million, given no changes in the dividend, it should be about this level?

That's correct.

Okay, fair enough. And secondly, you talked about the two new customers at MRO Virgin and you said the other regional carrier. What facilities are -- have those -- that incremental work done gone into?

It will be primarily Oklahoma City with Hot Springs as overflow.

And what about -- and Virgin is --?

Virgin is in Miami.

Okay. Okay, great. Thanks, guys.

I am showing no additional questions at this time.

Thank you very much for your participation today and have a nice day.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.