Good afternoon, ladies and gentlemen, and welcome to AAR's Fiscal 2016 First Quarter Earnings Call. We are joined today by David Storch, Chairman, President and Chief Executive Officer; John Fortson, Chief Financial Officer; Tim Romenesko, Vice Chairman and Chief Operating Officer of Expeditionary Services; John Holmes, Chief Operating Officer of Aviation Services; and Mike Sharp, Chief Accounting Officer and Controller. Before we begin, I like to remind you that comments made during the call may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, as noted in our news release and the risk factor section of the company's form 10-K for the fiscal year ended May 31, 2015. In providing forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. At this time, I'd like turn the call over to AAR's Chairman, President and Chief Executive Officer, David Storch.

Thank you, sir, and good afternoon to those attending today. And thank you for joining us to discuss the first quarter results. I am traveling today, so I am not in our corporate offices, but John, Tim, John Holmes and Mike Sharp are. So I'll direct the questions as questions are fired. If you have any direct questions for any of the guys, please feel free to ask them directly. Generally speaking, our first quarter was in line with internal expectations. If I may, just commenting on the businesses, aviation services sales saw an increase of $4.2 million compared to the prior year quarter. Our distribution program businesses were strong, they delivered solid results. Distribution business grew. Its customer based, and is actually achieving slightly above plan. Our program activity is strong, as well. Unfortunately, our trading business did experience some softness and performed below our internal expectations. But we do expect to rebound in the second quarter. And you may recall the trading businesses are really the ad hoc parts. Supply businesses, some of the engine shop activity that we normally support or that we do support was a little softer this summer than we had expected. We also began, during the period - although revenue will start in Q2, we started the ramp for our C-130 program in Afghanistan. We have our first wave of people in country now, and those revenues, in the past, I think we've indicated about $30 million contract. We are now expecting that contract to be roughly in the range of $50 million or $10 million a year. It's a 5 year contract and we should start seeing revenue in Q2. In our MRO network, we experienced a higher utilization. You recall summer months are usually a little tougher, as the airlines like…

Thanks, David. Good afternoon, everyone. I trust in each of you had a chance to read our earnings release. I'll talk about our financial performance in a little more detail. Let me start by saying that our sales for the quarter of $377.8 million were 4.4% less than our prior year sales. As David mentioned, we grew aviation services by $4.2 million, or 1.3%, year-over-year. Our expeditionary services segment, however, declined by 25.7% year-over-year. As expected, however, this segment grew 11.5% on a sequential basis due to the new fleet positions that David discussed at airlift. On the profitability side, our results were impacted by the softness in trading, and by the contract mix at airlift. Our gross profit margin was 14.4% consisting of 15.8% margin in aviation services, and 7.4% margin in expeditionary services. SG&A as a percentage of sales in the first quarter was 10.4%. This is higher than it has been in recent quarters, due to increased legal expenses, some of which will recur in the second quarter. Partially offsetting these increases was the realization of our corporate savings from actions we took in fiscal year 2015. Depreciation and amortization, including the amortization of stock-based compensation was $14.7 million for the quarter. For the first quarter, our effective tax rate was 34.9%. During the quarter the company used $63.7 million in cash flow from operations, due to investments in our supply chain business, a large tax payment, and the timing of receipts in MRO and at airlift. Capital expenditures for the quarter were $15 million. Net debt grew $51.5 million from last quarter to end at $150.8 million. During the quarter, we paid $2.6 million in dividends, and repurchased approximately 300,000 shares for $7.1 million. We also bought back 14.4 million of our convertible notes that are due in March of 2016. We started fiscal '16 with 35.1 million shares in the diluted share count, and we ended the quarter with 35.1 million shares. Finally, we have 22 aircraft under contract today versus 19 on August 31, 2014. Note that we plan to add two leased aircraft to the fleet by the end of the calendar year to serve under the Falkland Islands contract that David was referring to. Thanks for your attention, and I'll turn the call back over to David, or we can go straight to Q&A.

Thanks, John. So why don't we move on to the Q&A, please.

[Operator Instructions] Our first question comes from the line of Robert Spingarn from Credit Suisse. Please proceed with your question.

Hi, everybody. Hopefully you can hear me.

Can hear you.

Okay. Good. That's what I was looking for. I wanted to make sure we are connected. So that was a nice rebound there, modest rebound I should say and expeditionary I was owing to ask David and or John if you could talk about what we should expect in terms of flying position, as we go through the year you mentioned the leased aircraft, and so we're 22 now which I think is one above where we were July the last time we talked to you on one of these calls. How do we – how does the year play out here and how should we think about you know getting from a 7.5% gross margin, do we go back to the mid to high teens? How do we think about, can you frame that?

John Fortson, would you answer that please?

Sure. We are not giving guidance for the rest of the fiscal year. Obviously we have a business plan out there and we expect to see continued growth in our flying positions. You can extrapolate from the numbers that we've given you. It’s not too hard to envision that we could be in the sort of the mid to high 20 aircraft positions if some things go according to plan. But obviously there's execution risk in Afghanistan as well. So we feel good about where the fleet sits today. I do think from a mix perspective some of the contracts that we have today, we lost a couple of the very profitable S-92's and so that’s impacting the mix unfavorably from a margin perspective. But I think that as the fleet gets back to a more normalized level in the back part of the year you're going to see that - those margins improve.

Right. Because when I look at the revenues on a year-on-year basis they are almost flat…

Right.

316 versus 318, but the profit is about a third of was it was back then, 7% versus 18%. So what you are saying is we'll see some mix improve. We don't have to get triple the sales to get the same amount of profit?

No. Look. I think that's right. I think you'll see some mix improve. I think we've got some operational opportunities to improve the efficiencies of our fleet in different geographies and then obviously as other contracts come on board that we expect to see that will help it as well.

Okay. And then just the reluctance to go out with specific guidance. I don't know David maybe this is for you. But what - where does the hesitation come from?

Well, I mean, we've been through a fairly significant transformation at the company. So my preference is to let the dust settle. I think as we progress throughout the year I think we'll be in a better position to offer up guidance. So I think we indicated back in March that we were going to take a pause from guidance between now and through the second quarter of this fiscal year. And I'd like to stick with that at this point. So I think we'll have a lot more visibility come the second half of the year. We have to get all of our cost to flow through. We have a lot of one time exceptional costs and we want to get our hands around those and then we do have, as I indicate, a fairly robust pipeline inside of the airlift business and we want to see how that flushes out as well.

Okay. Fair enough. I'll pass it to the next person. Thank you.

Great.

And our next question comes from the line of Larry Solow from CJS Securities. Please proceed.

Okay. Great, thanks. Good afternoon, guys. On aviation services, David. I was wondering maybe if you could to sort of parcel out your thoughts for the remainder of the year. So I guess Q1 was a little weaker on your trading end of business and I guess that sort of translate to some of the weakness. Some of your – some of the other aftermarket providers have seen. Is that correct and what sort of gives you confidence that it’s a temporary thing, is it just sort of your - the air miles and capacity still remains strong? So…

Yes. So I mean, I have a little bit of advantage over others in that I've seen this movie for the last 37 years.

Absolutely.

So you know my sense is that we've had a little bit of a low. I've seen these before. My - in talking with some customers and talking with our people I get a sense that things - and I already see in the month of September that we are seeing some improvement. Now I am not excited yet…

Okay…

But I do believe that the - that we will see strengthening throughout the balance of the year and that, the first quarter was a little rough, but my sense is air miles haven’t really diminished much and what you would say the fleet age really hasn't changed a lot. And I think similar what you see with Southwest we're taking 737, 700s and putting them to work. I think my sense is that, that’s more of the norm than the - not then something out of the norm. So my view is that, yes, we'll see strengthening as the year progresses.

Okay. And not to hold you to this. I know it was in the guidance number, but on the last call is sort of two out sort of a double-digit sales expectation. You don't have to necessarily confirm that, but it sounds like you are still pretty confident that whether it's 10, 8 or 9 or whatever that you are pretty confident in the overall outlook is that…

Yes I am.

Okay. And then on the MRO side, nice to see Lake Charles actually turn positive. Is that - you know just the tip of the iceberg? How does the backlog looked they are and what your expectations as we go out?

Well, I believe that Lake Charles itself if I were to isolate Lake Charles it still have certain risks associated with it because we're still trying to get a normalized pattern going there. We came to the quarter I think in good shape and we have some opportunism. But I'd like to hold back, reserve my comment on that until I see another quarter or two under our - have another quarter or two under our belts. So in general though if I can comment on MRO in general…

Absolutely…

I feel very good about our prospects. And we are having good interaction with our customers. We're getting a sense that there is a fair amount of demand penting – that’s pent-up and we expect good solid results through the balance of the fiscal year from our MRO activities.

And on prior calls, I think if we go back even several quarters back, landing gear we had some slowness and it was - you had discussed it sort of being a cyclical downturn. Have we seen sort of the inflection point or do you still expect that to – is that part of your positive outlook?

Well, not as much as it is on the heavy maintenance side. However, we do see a better, let's say Q2 over Q1. But still not satisfied with the level of input and still not achieving the same levels we've had in the past. So I'd like to reserve my comments there as well.

Okay. And just on the SG&A line, I think you - there was the – with the severance for the consolidation and the MRO space was that $1.9 million was that actually - you didn’t pull that out as non-recurring, right?

Yes. Some of that occurred in SG&A and some of that occurred in direct expense.

Got you.

And the biggest thing right on - that would be unusual in the SG&A would be the legal costs that we've - some of the legal costs that we've incurred.

Right. Okay. And just last, and I don't want you - I know you put out a comment yesterday in terms of the - some of the legal stuff going on in your expeditionary services. So I realize you probably can't comment on that or where we stand with the State Department contract. One thing that sort of [copy] [ph] by surprise and I don't know if you can care to comment on it at all. But on your website I see you are sort of soliciting for a potential employment, and you still say that decision hasn’t been made, so that disclaimer is clear. But can I read anything into that other than you just – or you just being prepared in case you get that contract any thoughts?

Yes. Yes. We're getting - that's in preparation in the event that we've been in that [contract] [ph] That's correct.

Okay. Great. Thanks, David.

Yes.

Our next question comes from the line of Kevin Ciabattoni [KeyBanc Capital Markets]. Please proceed with your question.

Hi. Good afternoon, guys. Thanks for taking my questions here.

Hi, Kevin.

Just to follow up on Rob's first question on airlift. I know last quarter you talked a lot about the startup costs associated with some of these new contracts. Just curious if you saw any of that flow through here in 1Q and maybe what we can expect – should we expect margins to maybe get in 2Q with similar to startup cost creep up?

Tim Romenesko, do you want to take that question?

Sure. So we are expecting to have startup costs on the [Falkland's] [ph] program in Q2 and Q3 and it will be $3 million to $4 million. Its people cost, its training costs, its positioning cost. And so we think that that will have an impact between Q2 and Q3 and then Q4 when the program starts obviously those costs go away and then we flip around into profitability. So those are the - that's the biggest startup costs that we're seeing in front of us for the balance of the fiscal year.

And is that $3 million to $4 million cumulatively or per quarter…

Yes. No. Cumulatively…

Okay…

Spread over the two quarters.

Okay, thanks. You know any particular - you touched a little bit on the weakness in trading that I assume impacted supply chain and kind of the flat quarter year-over-year. I mean, was there anything else in supply chain in the quarter that was - that kind of came in below expectations and then anything specific in that trading business that caused that?

John Holmes, do you want answer that question?

Sure. Sure. Outside of trading, the rest of aviation services actually came in at or above expectations. Trading was the single area that was below and there really was not one single product or category that was soft. We felt it in multiple ways across the business, both on the engine parts and airframe part side. The only thing I would say is that in certain areas we saw weak demand and we had supply and in other areas we saw strong demand, but weren’t able to get our hands on the material to fill that demand. So we had a couple of different dynamics going there.

Okay. That's helpful. Thanks. You mentioned in the press release and on the call I think John this is probably directed at you, some investment, inventory investment for supply chain. Was that related to contract ones that you've already announced or business that you are kind of going after that we haven’t seen flow through yet?

That’s contract wins that are already announced. So building off of programs that have already been one and those investments online with the plan.

Okay. And then last one for me and I'll jump back in queue. Any color you can give on your thoughts around maybe additional stock repurchase activity going forward here just kind of based on where the stock is relative to where it was when we last talked?

I'll take that one. And we will watch that closely. We have about 95 million left on our authorization and we will look at that closely.

Okay. Thanks.

[Operator Instructions] Our next question comes from the line of J.B. Groh from D.A. Davidson. Please proceed with your question.

Hey John, I just wanted to clarify on the SG&A, you had some of that legal, [legal] [ph] is all in SG&A and the severance is split into the segments?

Yes, that's right. That's right.

Okay. So what's the appropriate level SG&A kind of on a go forward basis based on the – you had a pretty nice decline here quarter-to-quarter?

Well, we'd like to get it down. We've historically operated and called in the sort of 9.5% range and anything north of that we're sort of not happy with. But I think we want to be clear. I mean some of these legal expenses we expect to sort of continue for a while.

Okay. So those will persist for…

A couple of quarters, I would think.

Okay. Okay. Thanks. That's all I had.

[Operator Instructions] Our next question is a follow up question from the line of Robert Spingarn. Please proceed with your question.

Okay. So David or John, I am back with just some cadence questions. David you said earlier Q2 is going to be a little better sequentially than Q1 and then you are going to have more consistent results for Q3 and Q4, the kind of results that you would feel good about. Can you give us a little better sense of what that actually means in terms just relative to Q1?

I would expect that through the balance of the year we will continue to see improving results. And…

That part I got.

Yes.

So I'm looking at $0.23 in Q1…

Right.

I've got a 7% margin in Expeditionary. I think John was saying that will go up, though it sounds like it may go down before it goes up?

In the back part of the year, Robert.

Right.

Okay. Okay. So let's just start there. Does that mean that Expeditionary is a negative gross margin in Q2?

Not to our expectations.

Okay. Because you can absorb a couple million dollars or half of that cost you talked about and still be slightly positive?

That's correct…

Okay.

We expect to be positive in Q2.

Positive and then similarly positive in Q3 within a real nice number in Q4? Is that how I think of that Expeditionary profit?

Yes.

Okay. Okay. Fair enough. And then on the aviation side, given the fact that some businesses were better than expected, others were worse. Is that profitability level - is $50 million in gross profit per quarter kind of a steady run rate here or is it going up?

We expect to do better.

Okay. And just cadence wise how do we think about each of the other quarters. Do you expect to do better, sort of similar jumps per quarter or is it back ended?

Well, I think you are going to see a improvement, a steady improvement in Q2 and then hopefully you see more meaningful improvements in Q3 and Q4.

Okay…

And what I was referring to, Rob, is more from a historical perspective. I think we get into historical return levels by Q3.

By Q - that kind of a run rate which would then mean and I don't want to get too far ahead of ourselves that next year, presuming things go the right way you can actually get to a full year type of historical level?

Yes. Correct.

Okay, thank you.

Yes. And yes, correct.

Okay.

Yes. So we're seeing - just so everyone is clear. We're seeing strength in our businesses in the commercial markets. We see opportunities in the airlift market. We have softness in the defense spending for our mobility businesses. That would be I would say a general overview of our businesses. And we would expect that the supply chain business will continue to improve, as well as the MRO businesses and we see a little bit of choppiness though in the airlift business. We feel better about that once we have the Falklands contract operating versus you know, spending money to get ready for it to operate.

Right. I don't know if I am still connected here. But does that - it sounds to me, David, what you are saying is when you get all that together again you are back to doing $0.50 a quarter and maybe better. But the next quarter or two are going to be – won't be quite there, there will be somewhere between the $0.23 you just did and that target of $0.50, $0.60 a quarter?

I think that's a good way to look at it.

Okay. Thank you.

And our next question comes from the line of Larry Solow from CJS. Please proceed with your question.

David, just a quick follow-up, just on the mobility business. Obviously, it continues to remain soft. Do you think we are close to the bottom or obviously it's hard to predict a rebound, especially…

Yes. We predicted close to bottom before and…

No, I don’t…

Surprise ourselves. So what I would like to do is just wait and see how the government reacts to all the different skirmishes and activity around the world. Right now they've been very passive as you know and that’s impacted our business. If, in fact, troop levels stay steady or strengthen and we actually put troops, move troops around, it should spell opportunity for our business. But we've been a little bit surprised at the softness and don't know precisely if we are at bottom. But maybe Tim Romenesko, maybe he can give a little more color on that, if you don’t mind.

David is right. We predicted the bottom before and we've been wrong. We are seeing a little bit of year end activity around a couple of product lines. But other product lines are pretty quiet. So I think David's characterization is right on.

And the legal expenses, I mean, you've not given an exact number, is it somewhere around $2 million, $3 million something per quarter or is that…

Not that high.

Not that high. Okay. Okay, thanks.

[Operator Instructions] Our next question comes from the line of Kevin Ciabattoni [KeyBanc Capital Markets]. Please proceed.

Hey, thanks. One quick follow-up. I just wanted to touch base on the ExpressJet agreement with Airinmar that you guys recently. It seems like a pretty nice win. They've got a fairly sizable fleet. You know is that new work for you guys or something that you've been doing with them in the past?

John Holmes?

Yes. Sure. That is new work. That's a new contract. The scope of that is - and I would characterize it as a modest start. But there is an opportunity to add on the rest of that Airinmar services with SkyWest, ExpressJet jet. So that is a new win for that business.

Great. Thanks. That's all I have.

Thank you. And that concludes today's question and answer session. I'd like to turn the call back over to Mr. Storch for any closing remarks.

Well, thank you very much. Thank you for your attendance today and thanks for your very thoughtful questions. We remain very excited about our business. We feel really good about our position, feel really very positively about our balance sheet and the opportunity pull that we're looking at. So we look forward to our next call and hope everyone has a great day. All the best.

Ladies and gentlemen, thank you for attending today's conference. This does conclude today's program. You may now disconnect. Everyone have a great day.