David Storch - Chairman, CEO John Fortson - VP, CFO, Treasurer

Robert Spingarn - Credit Suisse Larry Solow - CJS Securities Tyler Hojo - Sidoti & Company Kevin Ciabattoni - KeyBanc Capital Markets Stan Manny - Manny Family Investors

Good morning ladies and gentlemen and welcome to AAR's Fiscal 2015 Third Quarter Earnings Call. Before we begin, I'd like to remind you that comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as noted in our news release and the Risk Factors section of the company's Form 10-K for the fiscal year ended May 31, 2014. In providing forward-looking statements, the company assumes no obligations to provide updates to reflect future circumstances or anticipated or unanticipated events. At this time, I'd like to turn the call over to AAR's Chairman and Chief Executive Officer, David Storch. You may begin.

Good morning. Thank you and thanks to all for joining us here today to discuss our third quarter fiscal 2015 results. As you can tell, a lot has being going on at the company and I'm pleased to announce that we've completed several strategic initiatives for the company and we continue to work on other funds as well. So, we finalized the sale of the Telair Cargo Group. The proceeds we received last week were 705 million. We have 20 million that's in escrow awaiting determination on a particular program and the results from that particular program. We’ve refinanced last week our revolving credit facility. We upped availability to 500 million and we got improved terms. We now essentially have taken anywhere from - let's call it 25 basis points to 75 basis points depending on level and where we are at in terms of cost interest rate reduction on that facility. We commenced this morning the redemption of our $375 million high yield notes. Now we will pay a makehold but the annual interest rate savings by doing this is about $23 million per year. Earlier in the quarter you saw where we announced that our Board has authorized the purchase of $250 million worth of our shares. We also announced the two segments that will be going in the market with. The one segment aviation services will be comprised by our supply chains and MRO businesses and our expeditionary services businesses will be our airlift and mobility businesses. We continue to see growth, solid growth in our aviation service businesses. I believe we have communicated sales increase of just right around 10%, I think it was 9.9% to be precise and over 30% growth in our gross profit margin. The parts business is particularly strong. The MRO business is improving and you may recall within MRO we have our heavy maintenance, we have component maintenance and we have landing gear maintenance. We're seeing good improvement not withstanding competitive pressures, we are seeing good improvement and results coming across that group of businesses. As you can see our airlift business as we've discussed in the past is more or less in transition mode. Last year at this time we had - we started last year's third quarter with 35 flying positions. We ended last year’s third quarter with 25 flying positions. Today we have 19 flying positions and we expect to be at 21 by the end of the - our fiscal year. And you can see, so we’ve had a little bit of rotation, we’ve had assets coming out of Afghanistan. We've been successfully in redeploying some of those assets into the DOD down in Africa and we also recently won our first UN contract. Don't get too excited on the UN contract from a profit contribution vantage point as much as may mean in terms of opportunities for the companies. We will be the first U.S. operator operating for them at least in recent history - at least in recent times. So it was a win that we have been working on for quite sometime. It's only one asset at this time but it is directionally I think a good indicator for our company. We are in the process of selling certain assets that we no longer are looking to reposition, we had some assets that we had classified for sales that we actually pulled back into inventory because we think that's a pretty good opportunity placing those particular assets. On the assets we have four sales. We expect to sell five of the – four of the assets in this quarter and hopefully close from a cash standpoint as well. So when you look at the businesses in Q3 in there composite, sales were down 5%, when you consider from an ongoing basis - from a going forward basis. But when you consider the reductions that we've had at the airlift operation in this quarter on a year-over-year basis, I think you can see it was actually a pretty decent quarter for the rest of our businesses. We will attempt to walk you through kind of what businesses would have look like had we not consummated the sales so you can get to some kind of an apples-to-apples comparison. So you can see we reported $0.05. When you take into consideration of the one-timers including adjustments for interest of the onetime adjustments come out to about $0.12. If you look at the airlift quarter on a quarter basis, if you look at the change on year-over-year basis, it's about $0.15. When you look at Telair, it's about $0.15. That would bring you up to about $0.47 and then when you back out the losses from [ANIS] [ph] is about $0.08, it would take you up to around $0.39. So, that’s our best effort at a reconciliation. We are entering the fourth quarter. I would say and as you look at next - fourth quarter will also add some noise, the noise will be a $200 million gain from the sale of Telair businesses. We will have a charge-off for the backhaul on the high yield notes, which we’ve communicated. And there may be certain other things that happened as a result of our efforts to commence in New Year with a nice fresh look at our business. So we feel we're in good position with our businesses, despite in MRO businesses, think of those businesses being aftermarket, independent aftermarket providers. We believe we have - at in least North America very solid leadership position in these markets. We're looking to expand more internationally and looking at various different spots as we've done in the past. Our expeditionary businesses which are really more or less type of supporting U.S. and other friendly government activities outside the United States, those businesses, mobility seems to be relatively stable and airlift as I indicated is going through a series of - is going through a transition out of Afghanistan but there are other fair amount of opportunities that we are looking at. So the building pipeline is strong and we have talked in the past about one particular large program which continues to be out there for the company. On the balance sheet, one more time we feel really good about how the banks view these moves and the feedback they gave us which shows up in terms of improved terms on our revolver I think speaks the volumes to what we are doing and I think in general we feel pretty good about where we stand. So, I think with that let me open up the calls to questions that you may have.

[Operator Instructions] Our first question comes from the line of Robert Spingarn with Credit Suisse. Your line is now open.

Good morning. Couple of things, with regard to Airlift, and the modest negative margin in the quarter, is this the breakeven level 19 positions? How do we think about that? And I think last quarter you answered a question, you thought you had a 100% visibility into 23 positions this quarter, we are obviously behind that/or below that level and it just seems like this business is either slow to recover or something is tough to see. Could you explain or frame the visibility that you do have?

I think the business has been little slower to recover. Keep in mind now, I believe part of those 23 were also the two that we have coming online later this year with the placement of two aircraft with the British Ministry of Defense against a ten year contract. So, I think it has been a little slower to recover than we had hoped. We have had a series of protest around certain wins that we have had and we have had a couple of programs that had been a little longer to materialize. But again Bob I would say that we feel good about the business. It's unfortunate that we had such a good year last year I guess, and the comparisons will be difficult but we will - you will see improved results coming out of that business.

So at this are we at a breakeven low? Are you close to where is 19 the number there, and what's the cash profile here? Is this business cash flow positive at this level?

The business has historically been extremely cash flow positive. So it's generated fair amount of cash for the company. At current, it's relatively flat from a cash flow standpoint. We will generate cash with the sale of the assets albeit in the $11 million to $12 million range. And we do anticipate that we will - probably this quarter be a net investor but the business should be generating positive cash out into '16.

Okay, and then just a last thing, could you give us a rough mix within expeditionary. The airlift versus the mobility, just an updated mix?

Call it 50-50. It's a little bit more airlift than it is mobility but approximately let's call it 50-50.

And profit wise and cash flow wise, how do we think about those two pieces?

There is a lot of different ways to look in these businesses. If we look at them snapshot wise, we’re getting more cash coming out of mobility. If we look it from a - let’s call it a five year horizon, they've both been very strong profit contributors to the company. Airlift at its peak would contribute far more cash than with mobility but mobility at its peak also contributed a fair amount of cash.

Okay. Thanks David.

They both by the way should add - they both are leadership positions in their respective markets. The both market I would say are going through - airlift a little bit more of the transition because of the heavy dependence we had on the Afghanistan market but both businesses are leaders in their respective markets.

Right. Thank you.

And our next question comes from the line of Larry Solow from CJS Securities. Your line is now open.

Good morning. Just on - touch on airlift again, just in terms of - so you positioned down about 20%, the revenue was down about 45%, or is that the expeditionary services dropped revenue, was that all airlift or was there continue drops in mobility that's a first question?

A little drop in mobility but mostly coming at airlift.

And is that sort of - the positions were down I guess the ones that remain I guess just less flying hours too so that sort of explain what's down?

Is less flying hours and we had as you recall Larry, we had the S-92s in prior period, and S-92s were huge contributors because it build more for them and they flew more. And the S-92s are now parked looking for a new home.

Okay. And what's the outlook for mobility? Is that sort of - you think reaching a trough and flattening?

I would say you'll have periods where it will be a little bit stronger and periods where it will be a little bit weaker. So I think it’s kind of bouncing around. It's still has a nice profitability, still a profitable business. But I would say its giving us a good return on capital but it’s just bouncing around.

Okay. And now the Telair deal is closed, I know you had a couple of sort of capital structure initiatives. Any clarity any thought on how you view share purchases and –

It's definitely in the mix. So it’s really just we’re just trying to get our thoughts together and figure out the best approach.

Okay, great. Thanks.

And our next question comes from the line of Tyler Hojo with Sidoti & Company. Your line is now open.

Hi, thanks for taking the question. Just to go back David your commentary surrounding free cash flow, I guess you talked about being a net investor in terms of cash in Q4. Was that specifically geared for the airlift business or the business overall?

I wouldn't expect the business overall be cash flow positive in Q4.

Okay. Got it.

I think we have certain challenges around airlift as we position assets or every time we win a contract, we have to put some investments - minor investment relatively so, but still investments in the assets and push-off slightly on the assets as well. So I think Q4 for airlift because of the sale of the assets we have pending, I would expect probably from all end probably expect it to be cash flow positive from an operating vantage point it may not be.

Okay, got it. And in regards to kind of the aircraft numbers within airlift, I think you said four are expected to be sold in Q4, how many are up for sale right now?

There is 12 available for sale right now. So we last reported to you guys the number was 16, we had talked about potentially taking it up to 18, but we've actually returned some S-61s to the active fleet for use in future mission. So we're sitting at 12 today.

Okay, got it. And then just one last one on airlift I promise. When we talk about kind of going back to Rob's question about where the breakeven is for this business, is there a number or is it really more predicated on the assets you have in Afghanistan and how heavily utilized they are?

I think it’s kind of a mixture of the number of flying positions plus the number of hours they're flying, plus the type of assets that they're. So I think as a point where we’re at right now, we’re kind of at that point that you’re talking about that breakeven point. So, yes, I think it's a mix of all of the above.

Okay. And in regards to kind of the new contracts that you're winning, I mean we talked about UN being kind of not as profitable as some of the legacy sort of contracts. Can you win business that's kind of comparable in profitability profile to kind of some of the legacy stuff is that -

I believe so yes, I believe that you may have - there were some very favorable pricing list, say, at a stage in the Afghanistan buildup, that pricing is probably not available today. But I would say that we have better pricing opportunities that are equal to profit opportunities that we're looking at, yes.

Okay, great. Thanks for that. And just lastly from me, no real kind of commentary from you guys just regards to some of the MRO growth initiatives, so just curious what’s going on, what’s the latest and greatest in regards to kind of the wide-body growth initiative?

We’re still working at hard, I mean we had a tough quarter in late trials, we have lot of build-up cost in late trials during the period notwithstanding those, we still had earnings growth from the businesses. We would expect that we will gain more traction, positive traction I should say this quarter than last. And we feel, we are out there trying to win more wide-body business.

Okay. So gaining traction is just basically winning new customers, is that?

Yes. And then performing to our expectation.

Got it, okay. Thanks so much. Appreciate it.

And our next question comes from the line of Kevin Ciabattoni with KeyBanc. Your line is now open.

Good morning guys. Thanks for taking my questions. Looking at the margin expansion in the quarter in aviation services, you talked about scope helping out there. David, just wondering if there is anything else you can kind of point to in a little bit more detail regarding the margins there and how you could potentially generate additional margin expansion in that business?

I think for the time being, we are seeing - I think we’re mapping from scale. So our cost structure is based relatively flat and we had slight increase in cost deploying those businesses. We had nice progress in volume improvement, so we’re gaining a little bit of scale that’s working on our favor. But we also – we are seeing improvement in our landing gear business for instance. So we’re gaining more volume coming through those that shop, our component shops are doing better. So I think across the board you’re seeing improvements in operating. Now we did have aching in Lake Charles, so Lake Charles was a negative contributor during the period which is not unusual this early in the build-up phase of one of our MROs.

So you’re - just touching on some of the I guess sub businesses of aviation services, it sounds like years coming back kind of as you expected and the trough looks to be in the rear view mirror there?

Yes. It’s slower than we expected and it's not as steep as we had hoped, but it is recovering.

Okay. And then in the press release you talked about using the new capital based kind of growth the existing businesses, what are you guys looking at now in terms of potential growth avenues, whether domestic versus international MRO versus supply chain, any kind of color you can talk about in terms of opportunities for growth?

So we’re looking at the supply chain business has been exceptionally strong. We are playing around with a few different international activities. You may recall last year we’ve acquired the inventory from Sabena Technics, that turned out to be a very good move for the company, very positive move. So we’re looking at other opportunities along those lines, and the pipeline is pretty good.

Okay. And then last one from me and then I'll jump back in queue. Can you talk at all about the kind of pace of the debt redemption and when - I think you mentioned $23 million of annualized savings in terms of kind of timing and the cadence for that what you’re expecting?

So we put out a - I don't think it's called a tender, but we put down a operative buy to redeem, a redemption I guess is the right word, a redemption on these bonds today and that is a 30 day process.

Okay. Great, thanks.

And our next question comes from the line of Stan Manny with Manny Family Investors. Your line is now open.

Hi all, Stan Manny. David, the use of cash that's coming, do you kind of identified the debt buyback, you identified the stock potential buyback and then there is - you’re generating cash flow continuously while you’re operating. So are there any specific, I know there has been some general questions but are there any specific plans to buy or add assets at all that you’re closed to?

I mean there is the always the possibility right, I mean its kind of the nature of our business is we’re always looking at opportunities. So in terms of close it's hard from me to - your definition of close Stan and mine might be different but we have stopped in the pipeline let me put it that way.

Okay. In MRO what seems to be a growing business and your prime asset, the concentrated assets, the area that do not represented very much is international, so can we expect anything in international build-out in MRO?

It's not for lack of effort. We have to find the right situation. I mean MRO has its kind of subtleties like every business does, but going international is not as easy as it sounds because you're dealing with different cultures and different work habits and things of that nature. Our view is that, yes, we are interested in international MRO. We have gone down numerous paths with different local potential partners, none of which have materialized but we are still out there stirring up the horn nest to try to find the right opportunity.

But you are involved. You are involved in Saudi Arabia, or UAE, on the build-out - you have reasonability for build-out over MRO truly I believe.

Yes, that's correct. But that's not – we won’t be operating that facility. We just - they are just buying our expertise on setting up the facility.

Okay. But you would not be operating it?

No. That's the - UAE government will be the operator, we are just - they procured certain capability from us that we are providing them.

Okay. So my last question on buyback. Is there a legal career that you can start buying stock to blackout some times you can. Can you define what the career that you could buyback stock or when it starts by SEC rules or whatever?

Well, there are rules and there are laws and we abide by every one of them. So it depends on the structure and we are right now in the blackout because we tend to allow investors 24-hours or so to absorb the information. So yes, we will abide by every law there is.

Okay. But the period – what I'm trying to get understand is, when does it open up possibility so you can legally start buying?

I think tomorrow.

Okay. Well good luck. Thank you very much.

Thank you. And I'm showing no further question at this time.

Okay. Thanks everyone for participating. And have a nice day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.