David Storch - Chairman & Chief Executive Officer Tim Romenesko - Chief Operating Officer John Fortson - Chief Financial Officer Mike Sharp - Chief Accounting Officer.

Larry Solow - CJS Securities Tyler Hojo - Sidoti & Company Krishna Vege - Credit Suisse J.B. Groh - D.A. Davidson Kevin Ciabattoni - KeyBanc Capital Markets.

Good afternoon ladies and gentlemen and welcome to the AAR’s Fiscal 2015, First 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 or 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..

Thank you, sir, and I’d like to welcome all participants and say I hope you are having a nice day. Thank you for joining us for today’s discussion of our fiscal 2015 first quarter results. We are here in Wood Dale, Illinois.

I’m joined by Tim Romenesko, our Chief Operating Officer; John Fortson, our Chief Financial Officer; and Mike Sharp, our Chief Accounting Officer. Just to share some of the highlights from the quarter, as we indicated sales were down in both of our segments.

Sales in our Aviation Service segment were lower, primarily due to the softness in our airlift operations and lower engineering activity in our airframe repair facilities.

However, I would like to point out supply chain sales to commercial and defense customers increased about approximately 20% during the period and we had growth in both, to the commercial markets and to the defense markets.

We continue to build on our industry leading positions in this business and in addition we had success extending our operations internationally with our new operations in Brussels. In the Technology Product segment, lower sales of mobility products contributed to the sales decline.

So consolidated sales, to commercial customers across the board increased by 2.4% and now represent 65% of our total revenue. Consolidated sales to the government defense customers decreased by 24% from the prior year period.

But what I’d like to share with you is kind of an overview of how we look at our government defense businesses and we really think of it in three buckets. Bucket one would be fleet sustainment. This would be characterized by supply chain and maintenance activity and in this piece of our defense business we did see growth in the period.

New production, we benefited from the increased production of the A400M cargo systems and lastly our businesses tied to the operational tempo that suffered declines and principally that group of defense business is made up of our mobility and airlift businesses and they are tied to the activity, principally in theaters such as Afghanistan and the Middle East.

In Aviation Services, sales in the first quarter were down 8% versus prior year and despite the overall lowers sales for the segment, our commercial and defense supply chain operations performed well in the quarter and as mentioned, sales were up 20% and we also saw an improvement in operating margins, an improvement by 300 basis points and as we’ve shared in prior communications, we have an enhanced focus on return on invested capital and in this group of businesses we saw 400 basis point improvement.

The business continues to gain momentum with our expanded partnerships, most recently with Eaton and we also have kicked off some of the supply chain programs supporting airlines that we’ve discussed, as well as new government support programs.

And as I indicated earlier, our Brussels facility allows us to expand our reach deeper into Europe, Middle East and Africa. Airframe repair this quarter had a tough comparable period due to the sale of an aircraft last year that ran through our maintenance facilities, as well as the slightly slower summer than we had seen in the past.

To give you a sense, we had an average about 42, not bad. We have an average of 42 aircrafts in our hangers during the summer and to give you a sense as to the trend, today we have 55 aircrafts in our facilities and are expecting a nice rebound in Q2. As mentioned in our release, we were awarded two new contracts with two major U.S.

carriers for narrow and wide body maintenance work to perform at our Lake Charles facility. So our Lake Charles facility, you may recall a year ago we signed the leases.

We commenced work roughly less than a year ago and business has been operating at a deficit and we expect with some of the new wins here that that business will start operating profitably here very soon, and if you liken it to our experience with Indianapolis, it took us a good year and a half in Indianapolis before we could start getting a decent return on that facility.

As for airlift, the business is down significantly from last year. Last year at this time we had 40 operating positions and you may recall we were experiencing excellent operational performance. This year still experiencing excellent operating performance, however we are down to 19 aircraft positions.

We are working hard at transitioning the aircraft that came out of Afghanistan and you may note that we’ve had some recent wins in Africa, both for rotary wing aircraft, as well as fixed wing aircraft.

Unfortunately the implementation of these contracts were delayed due to protest by the incumbent, but those protests have since cleared in our favor and the work begins in November 1 for one of the contracts and December 1 for the other contract. We are also bidding.

I think we have discussed in the past, we are also bidding on a very large state department contract of this business and we’ll have a sense as to whether we’re successful or not in the January, February timeframe. As for technology products, here sales were down 13%, driven predominately by softer demand for mobility products.

You may have caught recently that we’ve formed a cargo group, which includes the acquired Telair and Nordisk businesses with the AAR cargo business. That group has been performing quiet well of late; however, in this period we have a slight reduction in sales due to Boeing’s reduction of 747-8 production line.

We do expect cargo systems to ramp as the year progresses and Airbus starts delivery of the A350s. We are the cargo system provider on that aircraft and our content is worth approximately 400,000 per ship and keep in mind, there’s over 750 orders for that aircraft.

So if I may at this stage, what I’d like to do is turn the call over to John to fill you in on some of the financial details. .

Thanks David. I trust that each of you have had a chance to read our earnings release. On this call I'd like to review a few key points with regard to our performance. Our consolidated gross profit margin in the first quarter was 16%, down from a 16.5% in the prior year period.

This performance translated into a 16.3% margin for Aviation Services and a 15.3% for Technology Products. SG&A as a percentage of sales in the first quarter was 9.6%, slightly higher than the 9.3% in the prior year period.

SG&A expense however declined $2.8 million over the prior year period, reflecting continued cost control efforts, but increased slightly as a percentage of sales. Our operating margin for the quarter was 6.6%. Our margins were negatively impacted by the reduced contribution of airlift.

During the fourth quarter we generated $15 million of cash from operations and our capital expenditures were $9 million. We paid out $0.075 per share in dividends this quarter as well. We continue to focus on balance sheet management. As you may have seen, we initiated the process to call $30 million of our 1.625% convertible notes due in February.

We hope to conclude this exercise in the early part of October. .

For the first quarter in this fiscal year, our effective tax rate was 32.7% per our guidance in July. We expect this to be the rate for the remainder of the fiscal year and we ended the quarter with 39.2 million shares in the diluted share count. As noted in the earnings press release, we are also revising our earnings guidance.

Our previous earnings guidance included assumptions on a number and mix of contracted airlift positions that have yet to materialize due to the political uncertainty in Afghanistan.

Therefore we are lowering our earnings per share guidance from a range of $1.80 to $1.90 to a range of $1.65 to $1.75, and our sales guidance from a range of $2.1 billion to $2.15 billion to a range of $2 billion to $2.05 billion. Thank you for your attention and I will now turn the call back over to David..

Thanks John. Just in summary, we tried to capture it in the earnings release as well, is that you know our supply chain businesses are performing very well. MRO had a tough Q1, but we expect recovery in Q2 through Q4. As a matter of fact we are looking for improvement on a year-over-year basis for those businesses.

One of the things I’d like to stress in supply chain is, we do see strength both from the commercial and defense side of that business and in total we see those businesses as I said, performing quite well. Unfortunately the drop off in business in airlift has come as a faster clip than we had hoped for.

I still have a high level of confidence in the team we have in place and the opportunity pool that we are looking at for that business. But we are at this stage, based on what we know, and you may recall in the past we’ve announced a contract award that was refereed to as NATO 18.

Although we’re the successful contract winner, we have yet to receive any task orders and as we sit here today we have a high enough level of uncertainty that we’ve chosen to reduce our forecast for this type of activity. So I think it’s a prudent thing to do at this stage. We still feel very good about our businesses and our position.

We still maintain leadership positions in everything that we do and we’ll continue to stay very focused on taking market share, generating cash and giving a good account for ourselves and a good return to our share holders. We also continue looking at underperforming businesses.

We still have a couple of those and as I committed at the last conference call, we will have action against those businesses before the fiscal year is out. So with that, what I’d like to do is open up the call for any questions that you may have at this stage..

(Operator Instructions). First question is from Larry Solow of CJS Securities. Your line is open..

Hi, good afternoon David. Could you maybe just discuss just a little bit on airlift and then mobility. Airlift, everything actually you say is qualitatively in line. It sounds like commercial is humming along as you expected and improving. I think that the one question I have is, does airlift – could it stay at these levels or even go lower.

Does that take a couple of years to play itself out and then on mobility, has that taken another a little bit of a lag down or is it sort of just balancing on the bottom?.

Yes, so the airlift has probably taken a little bit further move down, not meaningfully as it has say last year over the prior year, but it continues to be challenged as it relates to airlift.

It’s a little unpredictable at this stage, because we are responding to a fair amount of our Qs and I still remain relatively optimistic that we can have nice successful performance coming out of the business. But keep in mind Larry, last year this quarter and last year the performance was exceptional and we would need more positions to go.

We’d have to get a tremendous increase in usage to approximate last year’s performance.

So we are not counting on last year’s performance to be duplicated, but we do see in the - we see next quarter also or the quarter that we are currently in being a little tough, because the actual positions, we were hopeful we were awarded those in the last fiscal year.

We were hopeful that that work would have kicked in in Q1; it didn’t because of the protest. As I indicated the protest has been cleared, but the work doesn’t begin until November 1 on one of the contracts and December on the other contract.

So as we sit here planning right now, we are thinking Q2 is kind of the trough period and that we start seeing an uptick in Q3 and Q4. .

And my concern actually is I realize that the near term is, with these just placed on, it’s not easy to – with delays as well. Just as you look out two, three years you mentioned the state department contract, which I imagine is – I don’t know if you can help us on size with that one, but are you bidding.

I know that there are other opportunities that you discussed in the past more globally, but are you attempting to get into those areas as Afghanistan. Even best case you will still have several aircraft to utilize. .

Yes, so we see opportunity. We see the Africa market expanding, so we see opportunities there. We see more opportunities around supporting the navy and we will be deploying some assets for additional navy contracts here shortly. So yes, I think we see a nice pool of opportunities. Of course, you know we’ve had a fair amount of aircraft come back at us.

So some that we didn’t expect and some that we did expect, but yes, I think the team is looking at quite a few opportunities. The state department opportunity is very sizable and hopefully we’ll give a good accounting for ourselves in this bidding process. But you know of course on that one it’s the winner takes it all.

You either win it or you don’t and if we win it its pretty and if you don’t win it, it’s not. .

Right, I guess that’s why I guess you got to try multiple shots on goal. I guess some of them hopefully reach the net..

That’s exactly right. So we are out there, the guys are slugging away. Just to be clear, still a profitable business and still making nice contributions, just not the levels it has in the past and it’s hard to for us to make up for the dip across our businesses, although we did to some extent. .

Right, and just one quickly if I may. Just on the expanded Eaton deal, you said it should ramp within about a year. So it actually seems pretty fast.

Is this deal similar in size to the one you did on the defense side with them? Is it a similar type arrangement and how is that ramping?.

Yes, it’s a smaller transaction. It’s a different customer base, but it’s a nice piece of business. It leverages our relationships there and it will ramp here fairly quickly..

Got you, great. Thanks. .

Thank you. Our next question is from Tyler Hojo of Sidoti & Company. Your line is open. .

Yes, hi. Good evening everyone. .

Hi Tyler..

Hi. So just going back to Airlift for a second, could you help us a little bit in terms of sizing that business today in terms of revenues? And I’m also kind of kind of curious; I guess we’ve got 19 positions today. What is the expectation for guidance? Is it that 19 positions remains stable or does it go up or down from there. .

So we are thinking that the low point is this quarter in the 19 range. We may come off a couple here in November and then we replace with others elsewhere. So we have a few more coming back from Afghanistan, but then we have a few going out to Africa, but we are expecting by Q3 to be at 23 aircraft. .

23 aircrafts, okay, great.

And then just as kind of this airlift relates to the overall business, I think historically speaking Q1 has been your weakest quarter, but with this airlift dynamic, is Q2 expected to be down sequentially in terms of earnings?.

No, we are looking at the Q2 being relatively flat with Q1 is how we are seeing it. .

Okay, great. And maybe just transitioning over to MRO, certainly nice to hear about the progress at St. Charles. Maybe David you could provide a little bit of commentary as to kind of where utilization is with the wins and where utilization needs to be or needs to go to in order to kind of make some of those ROIC bogies that you’ve set for yourself. .

So as we are sitting here today, we are strong in Oklahoma, Duluth, Miami and Indianapolis. We have a room for improvement at Lake Charles and in Hot Springs..

Okay, and in terms of timing on Lake Charles. Did these wins kind of get you to where you want to be or do you need to kind of win some more to kind of fill it to a more steady state level. .

Yes, Tim maybe you can answer that..

So Lake Charles is in good shape in terms of our outlook and our commitments from our customers.

What we are doing there is some of the work that we are doing now is lighter hours as we kind of get our [burn in] [ph] set and then as we go into the second half of the fiscal year with additional aircraft that come on with heavier manpower utilization, then we’ll see that ramp up more significantly.

But in terms of actual iron in the facility, we are in good shape. It’s just that the hours that we are working on them now are light compared to some of the other facilities. .

Yes, that’s great to hear.

Actually just one follow-up going back to airlift, how many aircrafts are currently available for sale there and I guess I’m just kind of curious on your perspective in regards to how those assets are being received in the market place? Are they desirable aircraft or are you getting pushed back?.

So there are 15 aircraft that we have determined are for sale. Those aircrafts are for the most part fairly niche oriented aircraft. So it’s the type of asset that if you have the right asset when somebody needs it, it’s very valuable and we’ve had a series of discussions with perspective customers. We’ve got to do a better job on remarketing.

The team has been very focused on repositioning aircraft into different theaters, but we are in the process of trying to onboard a individual to go ahead and have his exclusive responsibility to remarketing of these aircrafts. We don’t have that person onboard right now.

Right now we are handling it through our – actually through our purchasing department down there. We don’t have a aircraft sales department, but as a result of the build up of inventory, we will be focused on that. .

All right great. That’s all I had, that’s a lot gentlemen. .

Thank you..

Thank you. Our next question is from Julie Yates, Credit Suisse. Your line is open. .

Hey guys, this is Krishna Vege filling in for Julie. Just wanted to ask, it seems free cash flow to net income conversion was light this quarter compared to the last couple of 1Q’s. Just was wondering, what are some of the puts and takes on this and how does this compare with where you’d like it to be. Thanks. .

So you might note that also we commented that we made investments in our supply chain businesses. So we have net increase of invested capital, even though our return on capital was up 400 basis points. We have a net increase of invested capital there of approximately $25 million.

So yes, we are looking invest if you will in the growth of those business. So there is a little pressure short term here on cash, but I think we are investing it wisely. .

Okay, thank you..

You’re welcome..

The next question is from J.B. Groh of D.A. Davidson. Your line is open. .

Yes, hey guys. I just wanted to follow up on Tyler question. I didn’t hear you really kind of size that airlift business from the old segmentation to kind of the new segmentation.

Can you give us a little help there?.

No, we’ve never really sized that business precisely. So I don’t think its in our public information. So I think the way that we’ve been sizing it is really around the number of positions we may change. We may decide to do that differently, but for now at least J.B. we are sizing it by the number of aircrafts. .

Okay, that’s fair enough. And then just a question on, you’ve been….

And J.B. just to be clear, that’s for comparative purposes. We know right now and we have a leadership position and we are not looking to educate our competitors. .

Yes, completely understand. Just on the new deals that you’ve won and the small acquisition, how much of that is in the guidance. I mean in terms of the new deals, when do they start to contribute on the MRO side. .

Well, we should start seeing contribution this quarter. .

Okay. So that’s baked into the guidance, the update guidance. .

Yes, that’s correct. .

Okay. Thank you. .

Thank you. .

Thank you (Operator Instructions). The next question is from Kevin Ciabattoni, KeyBanc Capital Markets. Your line is open..

Thanks. Good afternoon guys. Thanks for taking my question here. .

Sure. .

Just one housekeeping on airlift. I think last quarter you mentioned 28 positions by the end of the year. Just kind of wondering where that stands now. I know you mentioned 23 by the end of 3Q. .

Yes. So hey Kevin, its John. I mean look, there were a number of aircraft positions tied to some contracts that we thought we were going to get awarded and we had a high level of confidence, but over the last 30 to 45 days the situation has deteriorated and we no longer think that those contracts are going to materialize, right.

So ultimately what we are loosing, nine slots to that, but then we are picking up an incremental four, right..

Okay..

Well yes, just to clarify, we did win those contracts, but we just haven’t received any task orders. .

Right. .

Okay. So I mean assuming that the NATO 18 contract largely, it seems like the power sharing agreements been singed there. Do you guys have any visibility into kind of when you are thinking the security agreement might get signed; maybe kick off some of those task orders. .

Yes, unfortunately we do not. You have as much visibility as we do at this point. We tried to gain some of that yesterday in preparation for the release, but we were not successful. So we were hopeful that the love in there would create some opportunities for us, but it hasn’t trickled down to us yet. .

Okay, that’s helpful.

And then shifting over to kind of the commercial side, could you maybe walk us through the process you went through looking at building the new facility and kind of what we can expect there in terms of CapEx contribution from you guys between now and when that…?.

So when we looked at the global market and zeroed in on the U.S. market, we see a need for maintenance hangers that are capable of managing these new generation aircrafts, where the tails are a little bit higher and the wings are a little bit longer and there aren’t many facilities in North America capable of handling these aircrafts.

The State of Illinois was very helpful in allocating funds to build a state of the art that would accommodate these new generation aircrafts and they put together a very attractive package for us and we’ll probably start commence building in about six months. It will probably take 18 months from there.

So by that stage, some of these aircrafts, the 777X and the 787 will be getting to the point were they’ll be entering the maintenance cycle and we should be in a good position to capture some of that work and the facility will go a long way towards helping.

Now, in addition to the maintenance facilities that they are building, they are also building a mechanics training facility next door. So we are hopeful that they will be graduating somewhere between a 100 and 150 machines a year that would provide us with a wealth of trained folks to work on these aircrafts. .

Yes, I know that’s been a headwind for you guys in a past, on new talent, so that’s promising. .

I give the State of Illinois credit, not really thought of as a business friendly environment.

In this case I think they thought this through very intelligently in terms of kind of combining the training with the facilities with selecting what they consider to be the best MRO provider in the North America and going ahead and pulling the trigger and putting the capital behind this idea. .

Okay, thanks. And then just turning to Europe quick, maybe if you have any color you can give us on what type of opportunities you are seeing there via the Brussels operation? It sounds like its going well. Was just kind of curious as to what – maybe if you can give some more specifics. .

Yes, so we are touching customers that we haven’t touched in the past. So clearly we are in addition to providing them the contracted services that they’ve already agreed to with the predecessor entity, we are seeing opportunities to provide other products and services to these customers.

So we are fairly optimistic that we can get us a fair share of business from that market, see some growth, take some of the activities deeper into the Middle East where you are seeing growth particularly in new generation aircrafts without the infrastructure lets say, and then the African market, we are looking on that fairly positively as well.

So we have a fair level of dialog in all three markets and are relatively encouraged with near term, mid-term and longer term opportunities. .

Great, thank you. I’ll jump back in queue. .

Okay. Thank you. .

Thank you. We have no future questions at this time. I’d like to turn the call over to management for any closing remarks. .

Well, thank you for your participation today and I wish everybody a good day and look forward to chatting with everybody in December when we release second quarter results. Thank you..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day..