David Storch - Chairman and Chief Executive Officer John Holmes - President and Chief Operating Officer Mike Milligan - Vice President and Chief Financial Officer Tim Romenesko - Vice Chairman.

Larry Solow - CJS Securities Ben Klieve - Noble Capital Markets Michael Ciarmoli - SunTrust Robinson Humphrey.

Good afternoon, ladies and gentlemen. And welcome to AAR's Fiscal Year 2018 First Quarter Earnings Call. We are joined today by David Storch, Chairman and Chief Executive Officer; John Holmes, President and COO; Mike Milligan, Vice President and CFO and Tim Romenesko, Vice Chairman.

Before we begin, I would like to remind you that the 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, 2017.

In providing forward-looking statements, the Company assumed no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. At this time, I would like to turn the call over to AAR's Chairman and Chief Executive Officer, David Storch..

Thank you, and good afternoon, everyone. Thanks for joining us here today. With me in Chicago we have, Mike Milligan, who joined the Company September 1st. Mike is our new CFO, and he'll introduce himself a little further in this presentation.

Very excited to have Mike join the team and counting on great things coming from Mike in his -- as he gets familiarize himself with our industry and the Company. He's off to a good start and working very closely with Tim Romenesko.

Tim, as we discussed before, also here with me in Chicago will be retiring December 31st and I can't say enough good things about Tim. He's just been a real strong force here at the Company and a great business partner to many of us here. And although he will be retiring, he will still stay engaged with the Company from [MLV] or post his retirement.

Also here is John Holmes. John, as you recall, was named President and Chief Operating Officer effective June 1, and he recently joined our Board. So very strong team here, and we’ll all be available to answer any questions that may come as a result of our opening comments. Now, turning back to the quarter. As you can see, we had solid first quarter.

Diluted earnings per share increased nearly 11% from $0.28 last year to $0.31 in the current period. First quarter sales were up 8.5% for the quarter with sales within Aviation Services slightly above our long term target of 5% to 10% growth.

The growth was even more impactful when taking into consideration the wind down of the KC-10 program, which contributed $26.9 million, less than the prior year sales. We were especially pleased with the performance of our industry leading integrated supply chain businesses.

And during the quarter, we announced significant new business wins to this group of businesses, including a long-term contract awarded to us by Hawaiian Airlines to support their new Airbus neo aircraft.

We’ve had a long-term and longstanding relationship with Hawaiian, and very excited to expand this relationship to support their new fleet of 18 A321neo's, a very exciting airplane for them and a very exciting program for us, get's us on to new technology Airbus platform. And we're very excited about those prospects.

We’re also awarded a long term contract to provide comprehensive flight-hour component support for 100 new Boeing 737 MAX aircraft with flydubai, which is expected to commence in October 2017. This is our second significant supply contract with flydubai. You may recall, last year, we announced the PBH program for 60 737neo’s in support of flydubai.

We're very excited to grow our business with them as they’ve proven to be a successful regional carrier and the first MAX operator in the Middle East.

So both of these contracts are meaningful in relationship to deepening our relationships with both of these important customers, but also meaningful in terms of providing an entrée for us to support these newest generation aircraft, which have had good successes in terms of sales rates coming both from Airbus for their version, which is the A320 family and for Boeing in their 737 family.

Lastly, during the quarter, our aviation services businesses received a notice to proceed on the 15 year $900 million Landing Gear Performance-Based Logistics One program with U.S. Air Force, which we had previously announced.

For this program, we're providing total supply chain management, including inventory logistics and repair services to support the Air Force requisitions received in support of all their C-130, KC-135 and E-3 landing gear requirements. And this program is expected to commence next April.

Finally, earlier today, you may have seen that we announced the acquisition of two MRO businesses from premier aviation in Canada. Simultaneous with this acquisition, we announced the new long-term contract with Air Canada for airplane maintenance on their narrow-body fleet and their regional fleet of aircraft.

These airframe maintenance services will be performed in our newly acquired Canadian facilities. The total value of this contract is approximately CAD500 million. This is not all incremental because we are currently doing business with Air Canada, and we’ll know shortly we’ll be able to communicate shortly what the impact is in terms of growth.

But it’s a nice increase in business with Air Canada. And with that, I would like to turn the call over to Mike so he can give you a little bit more color on our financials.

So Mike?.

Great, thanks David. Good afternoon everybody. It’s a pleasure to be here today. I recently joined AAR on September 1st after more than 30-years of financial experience in both public accounting and industry. Most recently, I was a CFO of a large private equity owned equipment rental company that was purchased by the industry leader back in April.

I am excited and impressed with the AAR team at all levels and feel that the Company is well positioned for growth in the future. And I look forward to working out with all of you in the coming periods. I’ll run through a few of the comments on the Company's first quarter '18 financial performance. Then we can move to Q&A.

As you can see in the release, we experienced strong sales growth in the quarter, up to $439 million, up 8.5% or $34 million from the same period in the prior year. These increases were driven by strong performance of our Aviation Services segment.

Sales at the Aviation Services segment increased $37 million or 11% year-over-year, and the related gross profit increased $4.4 million or 8% for the current quarter. Notwithstanding how good we feel about the results, it should be noted that the operating income was down slightly year-over-year.

In this year's results, we incurred $1 million of non-recurring costs and in last year's results we recognized $2.6 million gain from the sale of a product line in expeditionary services. Normalizing our performance would show 20% increase in operating results year-over-year. Consolidated net income was up 11.5% to $10.6 million year-over-year.

Our income tax was favorably impacted in the quarter by adapting new amended accounting standard for stock-based compensation. That impact was $1.2 million favorable amount. Our capital expenditures for the quarter were $8.2 million and depreciation and amortization for the same period was $14.6 million.

During the quarter, we paid dividends of $2.6 million or $0.75 per share. We repurchased 142,600 shares in the quarter at $5.2 million.

Our average diluted share count for the quarter was $34.5 million compared to $34.2 million in the prior year, and reflected increases of option exercises and additional grants offset by the reduction of more than 600,000 shares that were repurchased year-over-year. With that, I'll kick it back over to David..

Thanks Mike. And once again, welcome to the Company and great job there. Appreciate it. I’ll just end by saying, I'm sure you recall that historically first quarter is relatively soft quarter to compared to others; and that the airlines have most aircraft to flying; demand is pretty high in the summer months.

And historically, this has been a softer quarter than other quarters, but still nice increase over the prior year. And I feel good about the progress we’ve made during the quarter. I feel good about the acquisition that we announced this morning.

But mostly, I feel really good about our leadership team and the momentum this team is generating as we come into the second quarter of our fiscal year. So with that, thanks for joining us. And we’ll open it up for any questions you might have..

[Operator Instructions] Your first question comes from the line of Larry Solow..

Thanks. First off, just want to wish Tim best of luck. It's been a pleasure to work with you for last 11 years….

Thanks Larry..

Yes, absolutely. And then welcome to the Company Mike, and we look forward to continuing the relationship. But just first question, just on the Aviation Services, obviously, a really good quarter, I think it's like 20% -- 21% growth excluding the KC-10 loss, which we’re aware of.

Was that program -- the programs biz and the distribution business have been growing like gain-busters as evidenced by your aircraft under contract in last year, the growth there. But did the distribution -- the trading parts business and the MRO businesses also pick up a little bit to help drive that growth. It’s a pretty good growth….

The trading sales were up $22 million or 42% and the commercial programs were up over $18 million..

So trading obviously did have an impact. Is that bump up -- was there anything in there that’s sort of unusual or anything or….

No. This is John Holmes. It's not unusual. We’ve had a nice recovery, I'll call it, over the last five or six quarters in the trading business. And volume, both for engine and airplane parts has actually been quite consistent over that period of time..

And then with that pretty good growth and then obviously the drop off of KC-10, which was -- from my understanding, much lower margins. You did call out the $1 million in non-recurring cost.

But on that, the gross margin line with just great growth still down, anything else in there mix wise or anything that was unusual or any thoughts on that?.

Not anything unusual..

So I mean is that the step down in gross margin was that due to those onetime costs or is it just little bit of surprise that you can grow 20% outside of a business that was probably not very profitable, but yet your gross margins year-over-year came down?.

Yes, it was due to those onetime costs. We had some restructuring in one of our businesses that resulted in some severance. And then we also had some customer movement in our MRO business that incurred some costs as we moved transition customers from one facility to another..

Got it. And then just last question on the purchase from Premier. Those facilities, were they -- obviously, Air Canada, you’re going to -- sounds like you’re going to bring their existing work out today plus the incremental to that facility.

Are those facilities serving other customers? Is there other revenue and utilization going on there, and as the transition goes to you guys?.

Yes. There is existing revenue there. The two facilities -- one of the facilities is full of other customers in addition to Air Canada, which we mentioned that the Air Canada E-Jet work is being done in the one facility already today along with other customers.

We plan to work with the existing customers to transition them either to the other Premier facility or other of ARR facilities as the A320 portion of the Air Canada work is pulled up..

Your next question comes from the line of Ben Klieve..

So couple of questions for you. First of all, to building off the discussion in the MRO facilities that you described. I'm wondering what if any impact will be on your existing U.S. based facilities? Are you anticipating any shipping business from the U.S.

up towards those Canadian facilities? How do you see that playing out?.

No, no. If anything, it could be the office that where we think some of the work that exists there and move it to another one of our U.S. based facilities. But nothing from the U.S. will migrate to Canada..

So this contract is not about moving and the acquisition is not about moving work or jobs outside the United States. In fact, this is purely around capturing business in the Canadian marketing and retaining business they currently do.

But we're looking at this as a way to bolster our presence in the North American market, strengthen our position here in North America, which obviously is mostly U.S. based..

And then with those facilities, is the workforce that’s there, is there any meaningful gain in representation?.

No..

And you said at neither facility?.

Neither facilities….

And I guess last question on that is the timing. David, you said that there would be some more information coming out about the -- what would be incremental growth above your existing relationships.

Do you guys know roughly when you think we're going to find out more about the specifics on the revenue, and when the revenue is going to begin ramping?.

We should be able to share that information in a week and half or 10 days. So at the end of next week, I think, we’ll have that information for you..

Your next question comes from the line of Michael Ciarmoli..

Maybe just to stay on that Premier.

What was the rationale for us and wanting to sell those businesses, those facilities?.

Well, you had a private owner, a entrepreneur. He was getting to an age where he’s looking to retire and lessen his burden, if you will. The businesses were growing; and I think if the timing was right for him and it was for us and it was for Air Canada.

So I think you can see there is a connection between the acquisition and the contract signing with Air Canada. And I think he was helpful in making all that happen..

Was this a competitive process, was anyone else interested, or was this more of exclusive with just you guys?.

I can't say that. You never know the things are 100% wise. I mean, we felt we had a good -- we've had a long standing relationship with Air Canada. Air Canada introduced us to these folks, and there may have been others. But I can't tell you that there were, or there weren't, I don’t know..

And then just -- I think you guys also had maybe an announcement, I think it might have been late August. You got an exclusive deal with AMETEK to distribute some of their military related content. Can you just elaborate on -- I think you've got a couple of these exclusive deals on the distribution side.

What are you guys bringing to the table that you're landing these contracts versus some of the other distributors out there? Why are some of these OEMs choosing you guys?.

Thanks for the question. Growing that distribution business has been a big part of our strategy for the last few years. And we've seen a lot of lot of success in capturing exclusive distributorships, just like the AMETEK deal.

I'd say the value proposition for us, relative to our two largest competitor AVL and Satair is our independence and our channels to market.

So with the growth of the Power-by-the-Hour business, with the growth of the MRO business, we have a number of touch points with the customers that allow us to push the OEM’s product in a way that our competitors may not be..

And then just last one, I'll ask more of a bigger picture on the market; Boeing pushing for their services entrée into the services market; they've got some pretty ambitious goals.

Have you guys seen anything? I mean, is there an opportunity for you guys to partner with Boeing? Is it more of a risk maybe as it relates to all the different aspects of your aviation businesses from the distribution, the integrated services supply chains? What color can you provide around what Boeing is or what you're seeing in the marketplace with Boeing?.

So Boeing, of course, is a very different company than AAR. And Boeing has made some noise about looking at the in the avionics industry in a way that they haven't in the past, largely due their interest in capturing more aftermarket activity. And I believe you've seen the UTC Collins transaction.

I believe that Boeing, our relationship with Boeing today, is their supplier, their customer and their competitor. They were a competitor on the flydubai transaction. And I'm sure they will win some competitions and there'll be a good competitor.

But nevertheless, I think we offer speed, customer familiarization, a broader product line offering in that we can support not just your Boeing fleet but also your Airbus and Bombardier and Embraer fleet. And this is our core fundamental business.

We understand and particularly around maintenance, we understand have a get aircraft in and out hangers quickly and safely. On the supply chain business, we understand how to value inventories in ways that might be a little tougher for somebody like Boeing.

Plus as I indicated, we go across the different platforms and aren’t Boeing centric or Airbus centric, but can really focus on the customer and their solution set. So we don't believe that their interest in the aftermarket is necessarily competitive to our interest. But time will tell. We feel good about our positioning..

Last one, INL contract.

Are we still on track for October 31st, or we’d hear something sooner?.

October 31st should be the latest date and also we might hear something sooner, but should be no later. As of today, no later than October 31st..

Your next question comes from the line of [Stan Mayer]..

I have a question on a contract that I don't think you've mentioned, so I'd like to get some clarity on.

The contract with the State Department the big contract, is that going to start in this fiscal?.

Yes. So Stan, the last question was around the INL contract, which is the state department contract. It is under a -- still under a protest. The first protest we succeeded at the GAO level, the encumbence then perceived through the U.S. government on their decision at the Court of Federal Claims. The case is currently at the Court of Federal Claims.

And they will be decision rendered on October 31, or sooner. But we have not begun work. We are hopeful that the decision will be in our favor as all the previous decisions have been. And that we would be receive and know this to commence work shortly thereafter..

So still in the pipeline….

Yes..

Use of cash, David. Can you give us your priorities for kind of priorities….

So Stan, similar to the past, we’re very focused on growing the business. So we're investing in the business.

We discussed in this call couple of contracts, the flydubai contract and the Hawaiian contract, as well as you’ve followed the Company over the years, other contracts, we've recently received in supporting the inventory needs of airlines around the world. And these contracts have appeared where they require investment.

And so we get -- start taking cash flows in return. We will continue to look for ways as we have with this acquisition of Premier to enhance the Company, enhance our value proposition. And under the belief that we're strengthening our product offering in a way that makes us more valuable over time.

So our first priority remains investing in the business -- and then we’ll look for ways to get capital back to our shareholders as we’ve also demonstrated over the last three to four years. So we've given back through share repurchase and dividends about $250 million.

And we have a recent reauthorization -- share repurchase authorization, I should say by the Board that refreshed our last authorization, which was $250 million worth of our stock. And we will, from time-to-time, be returning capital in that fashion..

Your cash flow with the premier -- you're currently using your full cash flow, but not liquidity?.

Yes. So our liquidity is -- we have a healthy liquidity position in excess of $300 million, and we’ll be financing the premier transaction with a specific piece of Canadian dollar based financing. And so our liquidity remained strong. We are investing in the business on Q1. We were a net investor, a net consumer of cash, I should say.

And we would expect that through the balance of the year we’ll be a net generator of cash..

Last question and probably may have no impact on you at all, but the United Tech Rockwell Collins acquisition.

How does that change either your planning, your strategy, your priorities? What affect will it have on AIR, if any?.

So we're very cognizant on the transaction. We do business with both Unite Technologies and Collins. We don’t anticipate that those relationships -- we're not anticipating any change in relationship. We’re a little bit tighter with UT than we would be with Collins.

So if anything, hopefully, the UT management will encourage Collins to do more business with us. So as we sit here today, we view it neutral to potentially positive..

Collins was your father-in- laws first account?.

Yes, it was true….

Everything goes in circles. Anyway, thank you. Good job..

There are no further questions at this time..

Okay. Well, thank you so much for your participation today. Hopefully, you're pleased with the results as we are. And look forward to the next time we convene. Thank you..

This concludes today's conference call. You may now disconnect..