HEICO Corp (HEI) 2008 Q1 法說會逐字稿

Welcome to the HEICO Corporation fiscal 2008 first quarter earnings conference call. During this call there will be breaks for questions. (OPERATOR INSTRUCTIONS)

At this time, I will turn the call over to Larry Mendelson, Chairman, President and CEO, of HEICO Corporation.

Thank you very much. And good morning to everybody on the call. We welcome you to the HEICO first quarter fiscal '08 earnings announcement teleconference. I'm Larry Mendelson, the CEO, of HEICO and I'm joined this morning here by Eric Mendelson, President of HEICO's Flight Support Group, Victor Mendelson, President of HEICO's Electronic Technologies Group and HEICO's General Counsel, and Tom Irwin, HEICO's Executive VP and CFO. Before we begin, Victor Mendelson will read a statement. Thank you. Certain statements made in today's conference call will constitute forward-looking statements which are subject to risks, uncertainties and contingency.

HEICO's actual results may differ materially from those expressed in or implied by the forward-looking statements as a result of factors including but not limited to lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services, product specification cost and requirements which could cause an increase in our costs to complete contracts, Governmental and regulatory demands, export policies and restrictions, reductions in defense space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors which could reduce our sales, HEICO's ability to introduce new products and product pricing levels which could reduce our sales or sales growth, HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest rates and economic conditions within and out of the aviation, defense space and electronic industries, which can negatively impact our costs and revenues. And HEICO's ability to maintain effective internal controls which could adversely affect our business and the market price of our shares.

Those listening to today's call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission including but not limited to filings on Forms 10-K, 10-Q and 8-K. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Thank you. Thank you, Victor. And before reviewing our first quarter operating results in detail, I would like to take a few moments to summarize the highlights of what we consider to be an outstanding first quarter. Both Flight Support and Electronic Technologies reported higher sales and earnings in the first quarter of '08, combining for an overall 18% improvement in consolidated net sales and a big 36% increase in consolidated net operating income over the first quarter of last year. Consolidated operating margins increased 2.2 percentage points to 17.3% in the first quarter of '08, up from 15.1% in the first quarter of last year. I would like to point out that as most of you know, at HEICO we focus on operating income and not so much on the top line growth. And our guidance at $580 million is about 14% top line growth over the prior year. We do show very strong growth in operating income. The higher sales and operating margins contributed to a 27% increase in consolidated net income over the prior year's first quarter. Again, that's what we focus on.

In the first quarter of '08, we completed our 36 and 37 acquisition since 1990 with the addition of two small companies. One a PMA company and one an MRO services company. These were both acquisitions that were easy fold-ins for us and just added to our product line. Very, very synergistic. Very compatible. In January '08, we paid our 59th consecutive semi-annual cash dividend since 1979. The cash dividend to $0.05 per share represents a 25% increase over the prior per share amount of $0.04. We do believe that our operating results and our acquisition successes are a further indication of the concentrated efforts for long-term sustainable growth at HEICO. And as I have said many times before, we consider HEICO a growth Company and we expect this year's performance to continue to prove it.

Moving down to net sales, we note that consolidated net sales in the first quarter increased by just under $21 million, up about 18% from the first quarter of '07. Reflecting revenue growth of 16% in Flight Support and 25% within Electronic Technologies. Net sales of Flight Support increased to $102.3 million in the first quarter of '08, up 16% from $88.1 million in the first quarter of '07. The increase in Flight Support revenue reflects organic growth of approximately 12% as well as three small acquisitions completed since the first quarter of last year. Again, to repeat, they were product line acquisitions, very synergistic, easy fold-ins. Very typical type of acquisition for us.

Net sales with Electronic Technologies increased to $31.9 million in the first quarter of '08, up 25% from $25.6 million in the first quarter of '07. The increase reflects organic growth of approximately 14% and the strategic acquisitions of FerriShield in April '07, and EMD Technologies in September '07. Our net sales for the first quarter of '08 by market were composed of approximately 71% commercial aviation, 14% from defense and space and 15% from other markets including medical telecommunications and other electronics. These were essentially the same as the prior year with no significant fluctuations.

Moving down to operating income, very pleased to note consolidated operating income in the first quarter '08 increased 36% to $23.2 million, up from $17.1 million in the first quarter of last year. Operating income of Flight Support in the first quarter '08 increased 31% to $18.9 million, up from $14.4 million in the first quarter last year reflecting both higher sales and improved operating margins. Operating income in Electronic Technologies in the first quarter '08 increased 25% to $7.2 million, up from $5.8 million in the first quarter '07, reflecting strong organic growth as well as the acquisitions I mentioned earlier. Corporate expenses in the first quarter '08 were $2.9 million versus $3 million in the first quarter of the prior year. Operating margins, consolidated operating margin for the first quarter '08 improved to 17.3% from 15.1% in the first quarter of '07. Principally as a result of increased profit margins. The improved gross profit margins principally reflect higher operating margins within Flight Support.

The operating margins of flight support increased to 18.5%, up significantly from the first quarter of last year where they were 16.4%. This reflects a favorable product mix. The operating margins Electronic Technologies were 21. -- I'm sorry, 22.5% in both the first quarter of '08 and '07. And please note that we continue to target operating margins of 25% to 27% range for the full fiscal '08 in the Electronic Technologies group. Just for your knowledge, they were 27% in '07.

Diluted earning per share increased nicely to 23% increased 23% to $0.37 in the first quarter of '08, up from $0.30 in the first quarter of '07, reflecting increased operating income partially offset by increased minority interest share of income and a slightly higher effective tax rate. Depreciation and amortization expenses were $3.5 million in the first quarter '08, versus $2.9 million prior year first quarter, the increase due to increased amortization of acquired intangible assets and depreciation of acquired facilities and equipment relating to some acquisitions. Research and development was approximately $4.2 million in the first quarter '08 versus $4 million in the first quarter of '07. The addition of new FAA, PMA approvals continues to be a critical strategy to support our long-term growth. We now have over 6000 parts approved by the FAA and we're targeting approximately 400 new BMA certifications in '08. This does not include any potential acquisitions of companies that hold PMAs. These are internally developed new parts.

We also have a number of new products on new developments in Electronic Technologies. SG&A spending as a percentage of net sales decreased to 17.6% in the first quarter of '08, down slightly from the 17.9% in the first quarter of the prior year. And this reflects efficiencies realized on higher sales volumes. The increase in SG&A expense to $23.6 million in the first quarter '08 up from $20.3 million in the first quarter '07 is due principally to higher operating cost primarily personnel related. And that is associated with the growth in sales and includes the impact of acquisitions. Interest expense in the first quarter of '08 approximated the level in the first quarter of '07, reflecting higher average balances under the credit facility but offset by lower interest rates. And during the first quarter of '08, we increased borrowings under our revolving credit facility by $11 million used principally to fund acquisitions.

Interest and other income in the first quarter of both periods were really not significant. The Company's effective tax rate was 34.1% in the first quarter of '08, up from 30.3% in the first quarter of '07. The variance in the first quarter effective rate is principally due to the benefit of an income tax credit for qualified R&D activities the Company recognized for the full fiscal '06 recognized in the first quarter of '07 upon the retroactive extension of these tax credits. The aggregate tax credit net of expense increased net income by approximately $300,000 or $0.01 a share in the first quarter of '07. The minority interest shares of consolidated income was $4.6 million in the first quarter of '08, and $3.6 million in the first quarter '07. The increase from first quarter of '07 is attributable to higher earnings within Flight Support. The minority interest relate principally to the ownership interest that are held by Lufthansa in Flight Support and by others in certain subsidiaries of Flight Support including Seal Dynamics and Prime Air, as well as the minority interest held in certain Electronic Technology subsidiary.

Moving on to the balance sheet and cash flow, I want to point out that our financial position and cash flow remain extremely strong. Cash flow from operations was $9.8 million in the first quarter of '08 versus $3.1 million in the first quarter of '07. Cash flow increased primarily due to increased net income as well as good collection activity in accounts receivable. Our working capital ratio strengthened to 3.5 as of January 31, '08 versus 2.5 on October 31, '07. DSOs of accounts receivable equal 51 days as of January 31down-- of '08, down from 54 days in October 31, '07. And as you know, we continue to closely monitor, excuse me, receivable collection efforts and to manage our credit exposure. The inventory turnover rate as of January 31, '08 increased slightly to 124 days as compared to 117 days as of October 31. Just so you know, the calculation of DSO and inventory turnover on a quarterly basis can show some fluctuations. We in the Company prefer to look at it at an annual basis which smoothens out the short-term impact of minor changes.

No one customer accounted for more than 10% of sales. Our top five customers represent approximately 21% of consolidated sales in the first quarter of '08. Long-term debt to capitalization increased to 15% as of January '08 versus 13% at October 31, '07. Still a very, very low debt to capitalization.

Our outlook, as we look forward to the balance of fiscal '08 and beyond, we continue to believe our commitment to develop new products and services increased by product demand from our customers. Our strong financial position and our ability to identify select acquisition opportunities, provide the foundation for continued growth in sales and earnings. We further believe the long-term prospects of the commercial airline industry remain extremely strong. Based on current market conditions, we are raising our targeted '08 net sales to a range of $577 million to $581 million. Again, approximately 14% growth over '07. We are raising our operating income to a range of $102 million to $104 million. That's about a 20% growth over the prior year. And diluted net income per share to a range of $1.74 to $1.77, approximately a 21% growth over the prior year. These targets exclude the impact of any additional acquisitions.

We continue to target fiscal '08 cash flow from operating activities at about $70 million. And our Cap Ex expense -- expenditures to about $16 million to $18 million. At this point I do want to point out the variability of quarterly results. In the past and presently we do not give guidance on a quarterly basis. And the reason for that is that on a quarterly basis even as well as we understand the business, there can be fluctuations in product line, in sales, in a subsidiary, shipping or not shipping. And the difference between shipping on January 31 or February 2nd can have an impact on the gross profit and net income in a particular quarter. We feel very comfortable in predicting the operations and giving guidance on an annual basis where those fluctuations get smoothed out over a 12 month period.

As a comment, some of the analysts that cover us are doing an excellent job in trying to guesstimate what the quarterly results will be and it's a very, very difficult task in our opinion because for us to do it, it's almost impossible. But it's the analyst job to try to make those guesstimates and all of the guesstimates that we have seen have been based upon good information that they try to make. And I say that they are doing a very, very good job, but under very, very difficult conditions. So I prefer to look at annual guidance and I think that's really more indicative of what this Company will accomplish.

In closing, we continue to adhere to the long-term strategy that we've stuck to for many years. That is developing and marketing new products and services which provide our existing customers with improved technology. Substantial cost savings and permits us to expand our markets. We believe that this successful strategy has resulted in our strong financial position and also positions us with the opportunity for substantial forward growth. That is the extent of my prepared comments. And I would like to open the floor to any questions which you may have. So if the operator would kindly take any questions. Hello?

(OPERATOR INSTRUCTIONS) We have Arnie Ursaner on the line from CJS Security.

Larry, good morning to you.

Arnie, good morning.

Couple of real quick questions. The biggest one that I get asked these days about your business is obviously people are worried about the economy and while you had great growth they keep believing that your business is about to slow down. What are you seeing and what's your outlook?

Well, at be this point I'm aware of what economic gloom and doom is out there and what the press is saying. I can tell you that we have as late as last night Eric has been in touch with a number of his subsidiaries the significant ones. And we are not seeing that kind of slowdown. So again, we've given guidance that we truly believe will hold up. Now, saying all that we're aware that some airlines say that some things may slow and so forth and so on. But as of now we are not seeing that happen. In addition, keep in mind that the international sales and foreign sales which are increasing for us are holding up very, very well. And those guys are doing great. And Lufthansa had a blowout year and Lufthansa indicative of foreign sales and of course is a great customer of ours.

So at this point, Arnie, we were not seeing it. We're concerned. We're saying well maybe the other shoe is going to fall. But we came out with guidance that we believe in, annual guidance. And we raised it a little bit so that's what we honestly see. And you know us pretty well that we're not going to tell you something that we think is not going to be there.

As I said, it's just a question we get asked a lot. As long as you mention Lufthansa they obviously have recently signed an agreement with Jet Blue. When do you expect to see that contribute to your results? You had virtually no prior relationship with Jet Blue, but when do you hope to see some impact from that if at all?

Well I mean, optimist -- we, we don't have as far as I know at this point it's still very early. I believe that Jet Blue is smart enough to partner with Lufthansa and that means that I think that they're going to listen to suggestions from Lufthansa. And if Lufthansa advises Jet Blue the way I assume it will that it will impact us in a positive way. When it will start, it's really difficult to tell. I don't know what their schedule looks like. I mean their build schedule and overhaul and so forth. But I mean, I personally believe it's going to be a nice positive and but I can't predict when it might hit.

Would it be fair to say it's not embedded in your current guidance?

That's fair, yes.

Final question I have, is you obviously give a lot of detail on margin for the ETG growth-- ETG Group both by quarter and what your annual view is. You mentioned on Flight Support group, the 18.5 was sort of at the higher end due to a mix. But you've also made a number of acquisitions along the way and maybe it's not the exact same business. So since you didn't provide kind of your annual view of operating margin for Flight Support Group, how much of the 18.5 would you view as an anomaly? What do you think the annual rate is more likely to be? And again given the changes in that mix, what's a longer term view of margin in Flight Support Group?

That's a complicated detailed question, Arnie, so I'm going to hand that over to Tom Irwin. I think he could give you the right answer.

Yes, Arnie, with respect to our Flight Support Group as an example, last year's full year operating margins ran about 17.6%. We've indicated on a fairly consistently that we target modest improvement, on that I would say we target something around 18% on the full year. That would be 40 to 50 basis point improvement near term. That could vary depending on mix. But again if the mix changes it would not be at the expense of overall operating income improvement, our real focus. And on our recurring-- on an ongoing basis near term out three to five years, again, we look for modest continuing improvement operating margins, but again not dramatic 1%, 2%, 3% changes year-by-year.

Excellent quarter. Thank you.

Arnie, thank you very much.

Our next question on the line is from Tyler Hojo with Sidoti and Company.

Hey, good morning guys.

Tyler, good morning.

My first question is kind of a follow-up to Arnie's. But we're reading an awful lot lately about airline consolidation. I'm just wondering if maybe you could give us some idea just how that could impact HEICO one way or the other if something were to happen this year?

Truthfully we-- it's very hard to speculate on that. It depends what consolidations, where they go and so forth. For example, personally I think if Delta/Northwest it would be a positive for us. On some of the other ones, it's really hard to say. But we don't really expect any of the consolidations to have any material impact on our operations one way or the other. We don't see a major shift in it. It's-- Arnie's question about Jet Blue and Lufthansa, I think that perspectively that has a more positive implication than the discussed American carrier combinations. Because Jet blue was essentially was little or no customer. And Lufthansa is a very strong proponent of the leading proponent of alternative parts.

So I would love to see Lufthansa gobble up everybody on the block. So then I'd-- then if they did that, then I would say we'd have a blowout result. But the other ones are very hard to predict. But I don't see any material changes. I think for us it's business as usual. We're in the marketplace aggressively selling, (inaudible), developing parts and we're going to continue whether they combine operations or they run one-on-one. So I don't see a significant change.

Thanks for that. And then a follow-up to that, just in terms of the organic growth that we saw in the quarter, specific to the Flight Support Group, I guess I'm wondering how much of that was based on pricing increases this year?

I don't think there is that much. I mean some of it -- there's not a significant -- I think it's more of volume. In general, it's our growth is volume related as we've always said. So there may be a little bit. But not a significant amount. The driver is really the new parts and the market share and so forth.

Okay. Could you maybe talk about LTAs coming up sometime in the near future and maybe next year and maybe you had some come up last year and just kind of talk about the environment for those?

I'm going to let Eric handle that. We don't like to get specific for competitive reasons as you can imagine, so Eric's going to respond as best he can. But he can't be specific.

That's fine.

Tyler, be it for obvious reasons we can't comment ever on specific customers due to competitive reasons and also confidentiality that they request of us. However, I can tell you we're comfortable with our long-term agreement and don't see any reason why they won't be renewed and expanded in the ordinary course. The British Airways announcement was very powerful for the industry. British Airways is extremely well respected. And when they decided to go with us for an entire PMA program, I think that caused a lot of people around the world to look at HEICO in a different light and what we could provide. And I think that perhaps will lead to some additional LTAs. There's a lot of enthusiasm in the former and not interested, not very interested in PMA airlines.

Of course, when airlines start their out their-- start their business, they have a lot of leverage with manufacturers because they're taking a lot of deliveries. Then of course there's the honeymoon phase because the equipment works well and then as time goes on the reliability goes, typically will go down and the cost will go up and they'll start getting crosswise with the, with some of the original manufacturers and that's when we come in. And I think that the DA agreement really opened the door and opens the eyes of the number of carriers out there and hopefully that will lead to additional LTAs. I'm just going to say one more thing for Eric, read his lips.

Okay. Thanks.

Our next question on the line is from J.B. Groh with D.A. Davidson.

Good morning, guys.

J.B., good morning.

I had a question maybe for Eric on some of the retirement of some of the older aircraft. Obviously you guys have foreseen retirement of J.T./A.D. powered aircraft. Has that, with the high fuel cost environment, has that occurred faster than you had thought? Or maybe you can give us some comments there.

I mean, I can respond. The answer is, no, not really. There's still a lot of those airplanes flying out there. And it's good business. But we've not seen any -- any significant variation in that. Right, we of course, have a long-term modeling that the older less fuel efficient aircraft will come out of service sooner than the other one. But that's all really consistent with our guidance.

And that's I guess-- okay that's reflective in your business plan, of course.

Exactly. Exactly. And that's why really the focus has been for the last seven years the focus has been on new modern equipment.

Now Larry, you mentioned balance between U.S. and sort of rest of world. Can you remind us what that mix is currently?

So on the parts business, we disclosed that slightly over half is outside the U.S. So and that-- we've seen-- we continue to see great strength over in Europe and Asia and frankly the United States with regard to our business is holding up as well. Again, I think it's important to point out that when the economy slows down and the airlines get into a more difficult financial position, they more aggressively look and seek out cost savings. And that's really a time when we build market share. Of course, when the industry comes back and usage goes up, we'll build volume but we'll really get a lot of things approved and get a lot of people interested in what we're doing and really lay the groundwork for future expansion as things flow.

I just want to add to that. Because I think it's an excellent question. We all know what's happening U.S. versus the rest of the world in terms of economic growth. And you know the audience out there knows that HEICO has been increasing its international activity and revenue and so forth. And we see that it continuing and we're very happy about it because it gives us additional potential market share.

There are a lot of the airlines, the nonU.S. carriers were the later -- the latter ones or the last ones really to get into the alternative parts utilization activity. And from our point of view that gives us sustainable growth in a different market, even if the U.S. gets a little bit weak and really that's what we're seeing and that's what Eric was talking about other carriers, nonalternative parts, utilizers. We're optimistic that a lot of that's going to change. And we see that -- we see evidence of that.

Okay. And maybe you could comment quickly, Larry, on what you're seeing on the acquisition front. One of your other aerospace company the other day mentioned that there's sort of been a vacuum in terms of opportunity just based on what's been going on in the financial markets. Maybe you could comment on what you're seeing, obviously your appetite probably is still the same given your strong balance sheet and good cash flow?

That's exactly correct. We have no problems, credit problems. We have very strong balance sheet. We have the banks, every bank in the world may be is coming down on Tom Irwin to give him money to do something with. And we're very careful as to how we make acquisitions. We have a number of acquisitions on the look list. A number of them that we're doing due diligence on.

And I would say in total number we're, we probably have about the same as we've-- that we normally have. So financing is not a problem for us at all. We have all the money we need. We have more money than we need. So we're looking at opportunities and when we get the right opportunistic transaction we're going to make it. And again we're very disciplined as you know and we're not going to pay crazy prices or make a deal that makes no sense.

But in general have you seen either asking multiples come down or have you seen deals getting pulled because sellers don't think the environment is good?

The answer is, no.

Okay.

Neither of those has impacted us.

Okay. Thanks a lot. Congratulations to a nice start.

Thank you very much.

Next question on the line is from James Foung with Gabelli & Co.

Good morning, everyone.

Jim, how are you?

Good. I just want to get a better understanding of, Larry, the dynamics between global fly now verse in your business and also I guess the-- I guess if fly now starts to decline globally, does the airlines then kind of look at PMA parts in a more aggressive way which would offset the volume decline that you might see industry-wide?

Well, we would hope that that might be the result. You really never know, but there's no question that on a macro basis throughout the world that the alternative part is coming into its own. I mean it's more accepted by more airlines. We're getting requests for-- from airlines for different parts. Can you do this and that? So I think the appetite overall is that, yes, it's definitely expanding and I would hope that if things get tougher that there's going to be more appetite for it.

Now have you seen it in past cycles when global fly now has kind of dropped because of just economic weakness worldwide, did you see kind of a more pickup on PMA activities?

I think the answer is yes. People become more concerned with cost that in the past if they're looking for places to earn money and by cost savings is how they increase their margin. I wouldn't say it's a major -- it's not a macro change to our business. But definitely we get more demand and more calls. Also, Jim, this is Eric. One of the things that perhaps is most frustrating about our business is that an airline will decide that they want to use our products. But then they need to actually enter it into the system and get it approved. And where philosophically there may not be an issue it becomes just a matter of priority. And of course when, you're absolutely right, when economic conditions slow down, those priorities get pushed up to the front of the list.

Okay.

And that's why I was saying earlier that we really build market share when the economy starts turning down. And we really lay the groundwork for additional expansion going forward. Of course, we ultimately need the volumes to kick in for those products. But it really becomes a good a very good opportunity for us.

Okay. And I guess second question is do you have contingency plans in terms where you might cut costs if the economy's to be good than you expect this year or going -- ?

Well, I can comment from the Flight Support side, we continue to see great strength. So we have not thus far frankly looked at that. We see lot of internal growth in the business. We continue to recruit and develop our people and we're really very committed to them. And we don't see the slowdown in the business so I really think it would be premature.

Okay. Good. That's good. And then could you just speak on another broad issue with [Libertations] air travel, your European de-regulation. With your strong ties of nonU.S. carriers particularly Lufthansa. How would that help your business? I think it'd be a very big positive for you.

That's a good question. Our business is directly related to available (inaudible). And as ASMs expand they need to overhaul the engines, the components, the air frames and that's really what drives our business. So I think we're very well positioned throughout the world. And as more aircraft enters service and price points go down, it will only help our business. We're-- we obviously do a lot with the established carriers whether it's Lufthansa, American, United, and they're very capable of building their route networks and really getting their costs down and competing very seriously. So I think that we will continue to do very well.

How soon you might feel the effect, the impact of that? You think it just takes awhile because you have to go through the -- because you have the huge installed base that you have or do you think you can still see--?

Well, I think, James, specifically in the case of Lufthansa which a lot of people want to know about, Lufthansa has got a very important long haul market that we service and they are also very good at protecting and expanding their short haul market. If you look they have their low cost subsidiaries and they're very aggressively participating in that. So I think that it's going to be awhile. There is some question as to really whether the -- how much additional flying is going to occur because of this.

I mean, while it's interesting that for example Lufthansa and Air France and others are going to be able to fly out of Heathrow, of course British Airways has got the hub there. So it makes it much more difficult. So personally I think that it's more excitement than real fact. Yes, there will be some opportunities and people will pick off each other's flights a little bit. But I still think that the established European carriers whether it's their friends KLM, Lufthansa, British Airways are going to continue to maintain a dominance over their hub. And even though others will be able to fly in more, I think they're still going to remain very strong.

Good. Thank you (inaudible).

Thank you, Jim.

Our next question on the line is from Chris Donaghey with SunTrust Robinson Humphrey.

Thank you.

Chris?

Good morning, guys.

Good morning.

Good quarter. Eric, I wonder if you could just talk a little bit more about the British Airways relationship and how it ramps? And if you can, talk about what your expectations would be maybe on just a comparative basis for the margin and that business as it ramps, as the volume ramps? And then I'll just, also just kind of qualify the pipeline if you can of other airlines that you're trying to propose this type of arrangement to?

Well we, again we have to be a little careful on the specifics that we give out for particular customers because we're really prohibited from doing that. But I can tell you that the British Airways is ramping. We've been working this now, we announced our deal I guess it's maybe nine months ago or so. And things are moving along very well and as I mentioned earlier in the call I think there is a lot of excitement throughout the world, because when they saw HEICO signing up with BA on a total PMA support program where British Airways is going to buy all of their TMA parts through HEICO, and if HEICO doesn't have them we'll go out and-- a source and get other suppliers approved, I think that that's a very important concept in one where we can really do well.

So on BA things, without getting into detail, they're going very well. And the opportunity that we, again, we can't get into specific names of other carriers with whom we're working, but needless to say that we think that concept is going to be very successful and we're very optimistic that others will endorse it and accept it as well. Does that answer, I'm sorry does that answer your question or is there more that you'd like me to cover?

Well can you talk about this, the potential margin opportunity there? Is there a better margin opportunity when you are-- when they've essentially outsourced PMA to you guys? Or can you comment on that?

No. I mean I would say that it's consistent with our existing business. I mean we-- for competitive reasons we can't comment on specific margin. But I can tell you as far as HEICO is concerned, the benefit, I mean we're not trying to make a whole ton of money distributing other people's products into BA. First of all, HEICO has the lion share of the PMA market anyway. So most of them are coming from HEICO. Really the benefit is that it exposes us to other areas. Traditionally our customers have viewed us in the engine and the component world. And this is really opening our eyes to some other opportunity.

So we go out and qualify the sources for BA. We go ahead and do all of the technical evaluation and make sure that it meets the HEICO standard. Of course, HEICO stands behind the product so we take that very seriously. BA gets the comfort that we do it and it really opens up additional opportunities for us on parts that we hadn't considered in the past. So as far as margin, I mean we're not trying to really pass through other people's product at a big profit. We're really trying to see what's going on in the marketplace so we can develop additional products for our customers and save them incremental dollars on those additional products that we're going to ultimately do.

Okay. That's fine. And just going back now to your own product development, you talked about 400 PMAs being the target for 2008. Can you tell us what you think your notional capacity is with your existing infrastructure in terms of annual parts? In otherwards, if you wanted to go from 400 to 500 or 600, obviously, have to be dictated by the customers. But what type of capacity do you think you have with your existing infrastructure relative with that 400 parts per year target for this year?

Yes, that's a good question. I think that our existing capacity now exceeds the 400. And the internal goals are even more aggressive. I think it really depends on the customers and what they are able to approve and get done. Of course, if the market slows-- if the economy slows, then they become more serious about approving parts quicker. And I think that that will help drive our internal development up. I mean, there's no magic to the 400 number. I mean there's no reason we can't do 500 or 600 or even more than that. It really depends on the focus that the customers want to put on working with us to identify parts. To get them adopted and put into service. That's what really drives us. So I think it's just a very scalable number.

Okay, great. Thanks.

You're welcome. Thank you.

There are no more questions in queue at this time.

Okay, well that is the extent of the teleconference for the first quarter. As you know, we are available if you do have questions if we can respond to them you know where to reach us. And we look forward to speaking to you at the Q2 teleconference in another about three months. So you all have a good day and we'll speak to you real soon. Bye-bye.